Page last updated at 11:40 GMT, Friday, 19 December 2008

Japan forecasts no growth in 2009

Business people on Tokyo street - 15/12/2008
Japan's government has projected the economy will shrink this year

Japan's government has forecast that the country's economy will have zero growth in the year ending March 2010.

It is the first projection of no growth from the world's second largest economy in seven years.

It follows a revised projection for the current fiscal year that the economy will shrink by 0.8%, instead of the 1.3% growth forecast in July.

The Bank of Japan (BOJ) has cut its key interest rate to just 0.1%, down from 0.3%, taking it lower than US rates.

The BOJ leaves itself exposed to pressure to now cut rates to zero
Koji Ochiai, Mizuho Investors Securities

The BOJ also announced that it would increase its purchase of Japanese government bonds to 1.4 trillion yen ($15.7bn; 10.5bn) a month, up from 1.2 trillion yen.

"A small rate cut alone would not help the economy much," said Norio Miyagawa, economist at Shinko Research Institute.

"And with Japan's interest rates at nearly zero, the central bank will likely continue to adopt other measures to provide ample liquidity to help the economy."

To boost recovery after a prolonged recession, Japan kept rates at virtually zero until 2006.

'Worsening economy'

A survey earlier this week indicated business confidence in Japan was at its lowest in 34 years.

All that happened was that politically, the government couldn't forecast a contraction
Hideki Matsumura, Japan Research Institute

Last week the government increased its economic stimulus plan by 23 trillion yen ($255bn; 171bn).

The world's second-largest economy - and Asia's largest - shrank by an annualised rate of 1.8% in the third quarter.

"The economy is worsening very quickly and the BOJ and the government will need to keep working closely. But there is still no guarantee that announced steps will be able to stop the economy from collapsing," said Hideo Kumano at Dai-ichi Life Research Institute.

New recession

Some analysts think the government's forecast of zero growth next year was overly optimistic.

"Politically, the government couldn't forecast a contraction," said Hideki Matsumura, a senior economist at Japan Research Institute.

"A recovery is unlikely in the next two years," he said.

In recent years, Japan's economic growth was driven by exports due to high demand for cars, cameras and other goods.

After 2001, it enjoyed its longest period of economic growth since World War II until the sub-prime crisis started a year ago.

Since then the global downturn has led to global demand falling significantly, while a rising yen has also hit exporters.

Japan's economy has slipped into its first recession in seven years after two quarters of negative growth in a row.

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