Japanese economy enters recession for 1st time since 2001 as companies slash spending

Japan's economy slid into a recession for the first time since 2001, the government said Monday, as companies sharply cut back on spending in the third quarter amid the unfolding global financial crisis.

The world's second-largest economy contracted at an annual pace of 0.4 percent in the July-September period after a declining an annualized 3.7 percent in the second quarter. That means Japan, along with the 15-nation euro-zone, is now technically in a recession, defined as two straight quarters of contraction.

The result was worse than expected. Economists surveyed by Kyodo News agency had predicted an annualized 0.1 percent rise in the third quarter.

Japan's Economy Minister Kaoru Yosano said following the data's release that "the economy is in a recessionary phase," according to Kyodo.

But the worst may be yet to come in the wake of the global financial crisis, especially with dramatic declines in demand from consumers overseas for Japan's autos and electronics gadgets. Hurt also by a strengthening yen, a growing number of exporters big and small are slashing their profit, sales and spending projections for the full fiscal year through March.

Toyota Motor Corp., for example, has cut net profit full-year profit forecast to 550 billion yen ($5.5 billion) -- about a third of last year's earnings.

Compared to the previous quarter, gross domestic product shrank 0.1 percent, the Cabinet Office said. Business investment -- a main driver of Japan's six-year economic recovery since 2002 -- dropped 1.7 percent from the previous quarter.

"As the global economy is expected to slow down for the time being, downward movements (in Japan) are expected to continue," Yosano said, according to Kyodo.

Since taking office in late September, Japanese Prime Minister Taro Aso has unveiled two economic stimulus packages in an effort to cushion the blow. His latest 27 trillion-yen ($275.7 billion) proposal includes expanded credits for small businesses and a total 2 trillion yen ($20.4 billion) in cash disbursements to households.

At its last meeting, the Bank of Japan cut its key interest rate for the first time in more than seven years, lowering it to 0.3 percent, joining central banks around the world in trimming borrowing costs.

In its semiannual outlook report, the central bank slashed its projection for economic growth to just 0.1 percent for the year through March, compared with a 1.2 percent gain it projected in July. It said both exports and domestic private demand have weakened.

The deteriorating conditions also recently led Masamichi Adachi, senior economist at JPMorgan Securities in Tokyo, to downgrade his outlook on the Japanese economy.

"We are now looking for a severe recession, similar to that during Japan's own financial market crisis in 1997 to 1998, and to the current US recession, in terms of depth of real GDP contraction," he said in a report.

Monday's data showed that net exports sapped 0.2 percentage point from growth, as the high cost of importing fuel eclipsed a slight increase in outbound shipments. Imports rose 1.9 percent, while exports grew 0.7 percent.

Private consumption, which accounts for more than half of inflation-adjusted GDP, increased 0.3 percent from the previous quarter. However, the rebound in consumer demand is unlikely to last, economists say.

Where Everyday U.S. Costs Are Cheapest and Priciest

Think your last grocery bill seemed pricey? Be happy that you don't live in Sacramento, where a half-gallon of milk costs $2.97 on average. In fact, Sacramento's milk prices rank the highest of any major metropolitan city in the country.

New York City is another pricey spot. Not only are the city's average monthly mortgage, rent and energy bills the highest of any major city in the country, iceberg lettuce rings in at $2 per head, on average--double the price found in other cities.

Sure, $2 isn't going to bankrupt you, but as prices of everyday goods continue to rise and the economy continues to tank, seemingly small costs such as these begin to add up.

And things aren't getting any better. Just last week, the government announced unemployment was at 6.5%. It hasn't been this high in 14 years. No wonder consumer spending was down 0.3% in September, according to the Commerce Department.

As the economy continues its decline, those in San Antonio are far less likely to feel the pinch--at least when it comes to food prices. Residents there pay just $3.08 for an 11.5 oz. can of freeze-dried coffee, compared to $5.91 in San Francisco. And when it comes to bread, San Antonians win again: The average cost of a loaf of white bread is just $.79. In Manhattan, bread costs over three times that amount, at $2.68 per loaf.

Behind the Numbers

To determine the cities where everyday costs are the cheapest and most expensive, we turned to Council for Community and Economic Research (C2ER), an Arlington, Va.-based organization that works with local government and research groups to determine the costs of common goods in metropolitan statistical areas (MSAs) across the country. C2ER provided the average price of 10 different everyday costs in the urban areas of the top 40 largest MSAs in the third quarter of 2008.

An urban area is defined as an area of 50,000 or more people within an MSA. That means "satellite cities"--smaller cities within the MSA--are separated from the larger cities in this survey. Take Boston. Although a small city like Quincy, Mass. is a part of Boston's MSA, it was considered a separate city when compiling this research. Only Boston proper--which boasts an estimated 2008 population of 616,535--was included in the information offered about "Boston." Places like Brookline and Cambridge, which are also part of the overall Boston MSA, were not included.

But why are there such huge disparities across the country when it comes to everyday items? Sure, with its overpopulation and disproportionately high incomes, it makes sense that New York has the highest per-month mortgage rate, on average, or that Seattle--with its government-run energy supply--boasts the lowest monthly energy costs.

But what is it about San Antonio that keeps its food prices so low? Or New York's energy costs so high?

Erol Yildirim, director of data products at C2ER, says that in the simplest terms, it has to do with supply and demand. In San Antonio, for example, the median household income was $36,214, according to the U.S. Census Bureau. In Manhattan, the median income per household is $47,030. "People who make less money demand less, which means suppliers can't afford to charge more," says Yildirim

Prices Rising Everywhere

Of course, there are seasonal, local and economic variables that factor in to the prices.

For example, the total rise in food costs over 2008 is expected to be 5% to 6% nationwide, according to the U.S. Department of Agriculture. That's the biggest increase since 1990, which means we're all, on average, paying more to eat than we were in 2007.

And on a microeconomic level, prices have a lot to do not only with personal income in specific areas, but with the health of the city's very specific economic woes or triumphs. For example, part of the reason why many cities in California report high food prices has to do with the fact that energy and fuel costs in the region are high.

In Boston, a pair of denim jeans for boys cost $40, on average, in the third quarter of 2008. Why were they nearly three times more expensive there than in Indianapolis? There were fewer markdowns at the first city's retailers, meaning the demand was higher and the economy was stronger. And while the median household income in Boston is $52,792, it's just $40,051 in Indianapolis.

Unfortunately, as the economy worsens, this disparity between cheap and expensive isn't going to go away.

It's really a matter of the chicken or the egg: Workers in cities that provide a service or product that is in high demand need bigger salaries because costs are higher, and costs are higher because salaries are bigger. That's a difficult--if not impossible--cycle to break.

"If wages are higher to adjust to higher costs, then as long as the city/region can still produce a good or service that is in great demand elsewhere (e.g. finance in New York or software in Silicon Valley), then differences can certainly persist," says Dr. Dean Baker, co-director of the Center for Economic and Policy Research.

And then again, it's all relative. For the 250,000 auto workers in Michigan fearful for their jobs, $40 may be a heck of a lot for a pair jeans. For others, that's chump change.