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Economy

Ahead of tax hike, Japan economists split on recession fears

Declining production and weaker exports flagged as warning signs

TOKYO -- As Japanese economic data hints at a potential recession in the offing, analysts are divided on the state of the economy, weighing a strong labor market against weaker export and production numbers.

The monthly index of business conditions for January dropped to a level "signaling a possible turning point," government data released Thursday shows. But the downturn seems to reflect a manufacturing industry slowdown tied to a decline in exports, given that four of the nine indicators used to calculate the index are related to production or shipments.

The government's index of industrial production declined from the previous month for a third straight month in January. Exports dropped 8.4% on the year that month after a smaller decline in December, a trend that likely owes at least partly to an economic slowdown in China.

Yet real gross domestic product data released Friday showed a 1.9% annualized rise for the three months through December compared with the previous quarter, an upgrade from the provisional figure of 1.4%.

"We confirmed a moderate recovery" for the quarter, said Economic and Fiscal Policy Minister Toshimitsu Motegi.

The labor market remains historically tight, with 1.63 job openings for every job seeker, and businesses are raising wages to attract workers. Consumer spending grew 2% on the year in real terms in January.

Analysts expressed a range of views on what these mixed figures mean.

"With the Chinese economy showing signs of bottoming out, I don't think you can go so far as to say that Japan is in a recession," argued Yuji Shimanaka at Mitsubishi UFJ Morgan Stanley Securities.

Takeshi Minami at the Norinchukin Research Institute, by contrast, was one of two economists at the 14 private-sector institutions surveyed by Nikkei on Friday who said a recession had already begun.

By Minami's reckoning, the contraction started in November. "Consumption isn't strong enough to compensate for the slump in outside demand," he said.

Others said it is hard to tell right now. "The production decline in January may have been affected by the Lunar New Year in China," said Kentaro Arita at the Mizuho Research Institute. "We have to look at the February results to tell whether or not [Japan's] entered a recession."

The official determination of whether the economy was expanding or contracting in a given period is made after a year to a year and a half by a group of experts at the Cabinet Office. For now, analysts are awaiting the government's monthly economic report for March, to see whether it continues to describe the economy as "recovering at a moderate pace" as it has for more than a year.

"It won't be able to use that language anymore in March," said Shinichiro Kobayashi at Mitsubishi UFJ Research and Consulting.

Assessing the state of the economy is a tricky task for Prime Minister Shinzo Abe's administration, which faces an election for the upper house of parliament this summer and is slated to raise the consumption tax to 10% in October from 8% now. A weaker outlook will oblige the government to consider further stimulus measures, and the Bank of Japan's monetary policy could be affected as well.

A surge in buying is expected to precede the tax increase, muddying the economic picture further.

"We're not in a position where we need to" come out with even more stimulus measures in preparation for the tax hike, Finance Minister Taro Aso said Friday.

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