Goldman Says Japan Recession Risk at `Danger Level' (Update)

By Jason Clenfield

Jan. 10 (Bloomberg) -- Goldman Sachs Group said there's a 50 percent chance Japan will slip into recession and cut its 2008 growth estimate for the world's second-largest economy.

``We estimate the probability of a recession in Japan has risen to the `danger level,''' Tetsufumi Yamakawa, chief Japan economist at Goldman, said in a report to clients today. ``We project weaker-than-expected growth in Japan especially in the first half of 2008 owing to an inevitable, moderate slowdown among emerging economies.''

Bank of Japan Deputy Governor Toshiro Muto said today he expects the economy to keep slowing ``for the time being'' and the central bank will conduct policy ``with discretion.'' Goldman said yesterday the U.S. economy is falling into recession.

Yamakawa cut his 2008 growth estimate to 1 percent from 1.2 percent and said the central bank may have to forego raising rates this year.

Sluggish spending by consumers has left Japan more dependant on overseas markets, just as cooling U.S. demand threatens to spread to Asia, where Japan sells half its exports.

Stocks including Mitsubishi Estate Co. declined today after Credit Suisse Group said the defaults in U.S. subprime mortgages may prompt overseas investors to sell their property holdings in Japan.

Losing Momentum

The cycle of rising corporate profits feeding into wages and consumer spending is losing momentum, Muto said today.

``The greatest challenge for the Japanese economy, needless to say, is a recovery in personal consumption, which has remained in an extended slump,'' Goldman's Yamakawa said. ``Innumerable obstacles stand in the way.''

Falling wages, which have dropped about 10 percent in the last decade, and rising food and energy prices have sent consumer confidence to a near four-year low. Paychecks are unlikely to rise this year as rising oil prices crimp profits.

With domestic consumption flat, the economy is more dependent on foreign demand. Exports contributed almost of Japan's growth in the third quarter, as demand from Asia helped make up for slowing orders from the U.S.

The risk is that demand from Asia will also dry up.

``A U.S. slowdown affects Asia, beginning with China, and via that route it affects Japan,'' Ota said this week. ``The extent to which Japan is hurt depends on the severity of the U.S. slowdown.''