Contracting economy

Japan has joined the ranks of countries in recession amid signs the global economy is headed for a prolonged downturn. Figures released Monday by the Cabinet Office show that gross domestic product shrank in the July-September quarter for the second consecutive drop. It was the first time in about seven years this had occurred. The U.S. and European economies are also contracting.

The domestic economy shrank at an annualized rate of 0.4 percent in the July-September period from the previous quarter. While the margin of decline was smaller than the 3.7 percent drop in the previous quarter, the data made clear that the main engines of growth that had supported the nation's recently ended longest postwar economic expansion are now stalling.

Corporate investment in plant and equipment, which provided the main thrust for the expansion, is now on the skids. In response to the financial crisis and higher energy and raw materials prices in global markets, businesses are cutting their outlays, especially spending on export-related facilities. Exports grew slightly in the quarter but are losing steam. The nation's export-driven economic expansion is now over.

The situation will only get worse. The latest GDP figures barely reflect the shock wave created by the collapse of U.S. investment bank Lehman Brothers in mid-September or the effects of the yen's steep upswing and the stock market tumble in the ensuing weeks.

New vehicle sales in the U.S. market have been falling by 20 to 30 percent from year-earlier levels. Japanese exports are almost certain to start falling in coming months. Domestic machinery orders in the July-September quarter posted their largest drop on record. The figures suggest that companies are likely to further squeeze their capital spending on plant and equipment.

Personal consumption, which accounts for half of the nation's GDP, edged up by 0.3 percent. In October, the consumer confidence index sank to its lowest level since the government began collating such figures in 1982.

According to corporate earnings reports for the half year through September, the combined pretax profit of companies listed on the First Section of the Tokyo Stock Exchange dropped by 20 percent from a year earlier. A 25-percent decline is projected for the full-year profit through March 2009.

Still, many companies generated sizable profits for the half year. That is reassuring.

Domestic companies are no longer stuck with excessive debt, supply capacity and employment as they were during the last downturn. While they face rough going for the time being, they can now position themselves to capitalize on eventual economic recovery. In fact, the past few months have seen a flurry of mergers and acquisitions both at home and abroad in which Japanese companies played leading roles. This is definitely the time for Japanese companies to plot strategy to ensure a profitable future.

This is a great opportunity for Japanese companies with a global reach to reduce their excessive dependence on the U.S. market for profits and reinvent their strategies for a more balanced profit structure. They also need to lay the foundation for renewed growth in emerging economies like China.

The leaders of the 20 most industrialized and emerging economies who gathered in Washington last weekend to address the financial crisis agreed to take measures to bolster domestic demand. There are, however, troubling signs that the administration of Prime Minister Taro Aso lacks a coherent policy to deal with the economic downturn.

What is needed now is consistent policy support to promote new industries in areas like the environment that should fuel Japan's future growth and domestic demand-oriented industries with good growth potential, such as medical and welfare services.

The government should send out a clear message for structural changes by announcing, for instance, drastic spending reforms and bold steps for deregulation. Without such powerful policy initiatives, the nation's political leadership can do little to save the floundering economy.

The Asahi Shimbun,(IHT/Asahi)

North Korea vows to close border with South


SEOUL: North Korea on Monday said that it would go ahead with its threat to effectively close its land border with the South, including expelling South Korean managers from an industrial site just inside its border, from December 1. The reclusive state first warned nearly two weeks ago it would end traffic across the heavily armed border with its wealthy neighbor but this is the first time it has given details of the action it would take. North Korea's KCNA news agency said the measures were the first steps "to be taken in connection with the evermore undisguised anti-DPRK (North Korea) confrontational racket of the south Korean puppet authorities."

It will also suspend all tours to its border city of Kaesong, near the industrial park run by a South Korean firm, and halt rail traffic across the border. The Kaesong industrial park is the only significant commercial relationship between the Koreas, divided for more than half a century. KCNA said North Korea would selectively expel South Koreans from the industrial park. The site is home to nearly 90 South Korean companies which operate there to make use of cheap North Korean labor. The North has notified companies operating in Kaesong that it would allow some personnel to remain so that the plants can keep running, South Korea's Unification Ministry spokesman Kim Ho-nyeon later told reporters.

The move follows the end of a decade of unconditional aid from the South since conservative President Lee Myung-bak took office early this year with promises to invest heavily there only if Pyongyang moved to disable its nuclear weapons program. Lee made clear at the weekend he would not back down in the face of mounting tension with the North which accuses him of trying to reignite war on the Korean peninsula. Last month, it threatened to reduce the South to rubble unless it stopped civic groups sending the anti-Pyongyang leaflets across the border. Regional powers plan to resume talks in Beijing next month with the North on a deal to dismantle its atomic weapons program in exchange for aid and a chance to end its international isolation.