Japan back in recession as earthquake cuts consumption
Japan's economy, the world's third largest, has slid back into recession after the devastation caused by the earthquake and tsunami in March.
Gross domestic product shrank 0.9% in the first three months of the year, the Cabinet office said, giving an annualised rate of contraction of 3.7%.
Analysts say consumption and exports were worst hit.
Japan's economy has now contracted for two quarters in a row, the generally accepted definition of a recession.
Japan sank into a recession during the global financial crisis, but had emerged from it in 2009.
The contraction in the first three months of this year was bigger than expected, with most analysts expecting the annualised rate would show a contraction of about 2%.
"Japan's economy is expected to remain weak for the time being," said Japanese Economics Minister Kaoru Yosano on Thursday.
However, Mr Yosano said that supply constraints were easing and reconstruction demand was likely to spur growth.
"The economy has the strength to bounce back," Mr Yosano said.
Pessimistic consumers
Naomi Fink, Japan Strategist at Jefferies, said the most worrying part of the latest data was the decline in private consumption of 0.6%, as people cut their spending after the earthquake.
Private consumption accounts for almost 60% of the Japanese economy.
Roland Buerk reports from Tokyo on Japan's attempts to deal with power loss caused by the earthquake
"It was already soft in the final quarter of 2010," said Ms Fink.
The earthquake, however, has further dampened sentiment.
The consumer confidence index fell to 33.1 in April, according to the Cabinet Office, where a reading below 50 suggests consumer pessimism.
"Judging by the drop in retail sales and household expenditures over March, consumption should be one of the greater contributors to negative growth in the first quarter," said Ms Fink.
Damaged supply chains
The second biggest component of the world's third largest economy is trade.
Exports made up 13.5% and imports 12.7% of gross domestic product in 2009.
The massive earthquake and tsunami devastated exports, while the costs of imports rose due to high commodity prices.
Japan's trade surplus fell by 34.3% in March compared with the same month a year ago.
"One issue on the export side is the ongoing struggle to restore damaged production lines and supply chains," said Ms Fink.
"On the import side, the increase in demand for fossil fuels, to offset the drop in supply of nuclear energy, is unlikely to fade anytime soon," she added.
Reconstruction demand
Once rebuilding gathers momentum, however, it should have a positive impact on the economy.
But that is only likely to happen towards the end of this year.
"I do not expect positive growth in the second quarter," said Ms Fink.
The country's central bank begins its two-day meeting on Thursday to discuss its monetary policy.
"Japan's economic strength is gradually declining," Bank of Japan (BOJ) governor Masaaki Shirakawa told a parliamentary committee meeting on Tuesday.
Analysts say this signals that the central bank will stick to its ultra-loose monetary policy.
The bank has pumped billions of dollar into the financial system to stabilise the economy since the massive earthquake.
The BOJ is expected to keep the rates unchanged at the lowest level in a range of 0.0% to 0.1%, to help stimulate the economy.
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China's billionaires: Zong Qinghou, boss of Wahaha
By Nick Rosen
Author and filmmaker
Over two decades Zong Qinghou's company grew from a school shop selling vitamin drinks to having a 15% share of China's soft drinks market.
I met Zong Qinghou, by some measures China's richest man, in his office - an anonymous building near Hangzhou railway station.
His company Wahaha has a 15% share of China's soft drinks market, and sales of nearly a billion dollars a year in children's clothing.
Before the interview, we were ushered into the staff canteen, a plain oblong room with formica tables where the top staff eat the same food as the workers.
When we arrived in his office, I noticed the same meal had been laid out for their boss.
Zong's monk-like devotion to duty is legendary. A former employee remembers he personally reviewed every office expense, including the purchase of a broom.
He still personally signs every major spending decision. In his office are two safes in which he told me he keeps the company seals of each of his approximately 200 subsidiaries.
He says he lives on $20 a day. "My only exercise is doing market research... my only hobbies are smoking and drinking tea," he told me (when I asked, he said his favourite brand was Lipton's).
Liquid foundation
Over two decades, he grew the company from a shop in a school selling ice lollies and vitamin drinks.
In 1989, he established the Wahaha Nutritional Food Factory in Hangzhou to produce Wahaha Oral Liquid for Children.
It was demand for the nutritional drinks that were the foundation of his empire. When sales took off, the government invited him to take over a failing canning factory in the same town.
The two companies merged in 1991 after a fierce media campaign led by the employees of the canning company, who accused him of being a capitalist.
Zong runs the company with his wife and daughter. Family involvement is a common feature of entrepreneur-owned businesses in China.
The founders see family members as more trustworthy and reliable than other senior management.
His daughter runs important parts of the business, but Zong says he has not yet chosen her as his successor.
No handouts
Zong is unusual amongst Chinese businessmen in his focus on philanthropy. But he does not just give his money away.
He said hard work was the key to the poor lifting themselves out of poverty. If you give money to the poor "they just spend it," he told me.
His daugther is a US passport holder, and Mr Zong said his main interest in working with foreign companies is to import products which Chinese companies are bad at making, yet his joint venture to set up Chinese factories with Danone ended acrimoniously.
Meanwhile, the 67-year-old is busy planning a major expansion into retail. While Walmart and Carrefours are pulling out of Chinese operations, Zong plans to open 100 large supermarkets in second and third-tier cities.
Zong Qinghou's Honorary Titles:
•National Excellent Entrepreneur
•National Excellent Manager
•Model of Patriotism to Support the Armed Forces
•Outstanding Builder of Socialism with Chinese Characteristics
•The First Chinese Entrepreneurs Entrepreneurship Prize
Article written byPaul Mason
Economics editor, Newsnight
Ten points on the Euro crisis
1. The EU leaders are at loggerheads over the issue: should Greece be allowed to do a soft, controlled, partial default on its debts which forces banks and pension funds to lose some of the money they lent to Greece? Germany says yes, the European Central Bank chief Jean-Claude Trichet says no.
2. The question arises because the first Greek bailout, 110bn euros, did not work. Greece now needs another 85bn euros from the EU/IMF, and has to sell at least 30bn euros of assets on top of that because it cannot borrow in the global markets.
3. To justify the new bailout, both under its own rules and because voters in Finland, Netherlands and Germany resent the bailout, the EU is insisting on a new range of austerity measures, amounting to a 10% cut in public spending, a 1/3 cut in the public wage bill and 50bn euros worth of knockdown privatisation.
4. But the Greek PM George Papandreou could not get this through parliament. His majority fizzled to nothing as the details emerged and public pressure mounted. He offered a national unity government to New Democracy, the centre right, who refused; he offered to stand down on condition a new government signed up to the austerity plan, but no-one bought this.
5. So now, the one stable factor in the Euro crisis is gone. The Eurocrats were busy arguing over the terms of the bailout, but now their trusted dialogue partner has gone missing: even if a new government is sworn in on Thursday, how can the EU negotiate if there is no guarantee that the full spectrum of austerity measures can be got through the Greek parliament?
6. This is why the markets have long, already, discounted a hard default: 50 to 70% of the money is, as far as they are concerned, as good as gone.
7. But the moment of actually writing that into the account books will trigger a "credit event" for those who value and insure countries' sovereign debt. This will instantly raise people's aversion to risk: they will do instant de-risking of their own portfolios and you may come to a point where one bank refuses to lend to another. This is a credit crunch and is what the Euro policy makers fear. If it is triggered, it will negatively impact the whole world economy.
8. What's the fallback position? To let Greece default - chaotically or otherwise - but use taxpayers' money to bailout the affected north-European banks. That is what the German political elite is said to be considering. Market people are worried that Dexia, a Belgian bank, could be hit hard, bringing Belgian sovereign debt into the picture next.
9. Who will lose? Any pension fund or bank that lent money to Greece, Greek banks, or Greek people. And Greece will, if it drops out of the Eurozone, be forced to implement austerity anyway. However it will have economic sovereignty, which it does not have now.
10. Is there an alternative? Yes: a Marshall Plan for Europe, where German, French and British taxpayers voluntarily send money to Greece, Portugal and Ireland, shore-up their banks, shore-up their country finances, give them time to do structural reforms; in return they effectively seize control of south Europe's economic policy and impose a single Eurozone tax and spend regime. Another alternative is to let peripheral Europe leave the zone and rebuild it with Denmark and Sweden as a kind of "dark winter night" economic zone, based on sound principles and weak beer. Politics makes all of point 10 currently a non-starter.
11. Is there a wildcard? Yes: the Greek population. They will not accept any more austerity and if they succeed in resisting it, this will give Ireland and Portugal ideas. Another wildcard is the myopia of the Eurozone elite. It is not clear if they really understand points one to 10.
Demonstrations have continued on the streets of Athens, turning violent this week as protesters make clear their opposition to austerity measures.
Prime Minister George Papandreou looks like he is going to stay in his job, but has appointed a new cabinet.
Mr Papandreou has been trying to pass the austerity measures that are needed for the EU and IMF to continue making their payments under the original bail-out.
The next tranche of 12bn euros ($17bn; £11bn) from the original bail-out will almost certainly be paid, which will keep the Greek government going for a few more weeks.
It is now likely that a second bail-out package will be agreed in principle by EU finance ministers on Sunday, although there will not be details yet of the form that package will take.
Why does Greece need another bail out so soon?
Greece received its original bail-out only a little over a year ago in May 2010.
The reason it had to be bailed out was that it had become too expensive for it to borrow money commercially.
It had debts that needed to be paid and as it couldn't afford to borrow money from financial markets to pay them, it turned to the European Union and the International Monetary Fund.
The idea was to give Greece time to sort out its economy so that the cost for it to borrow money commercially would come down.
That has not yet happened. Indeed, the ratings agency S&P recently decided that Greece was the least credit-worthy country it monitors.
As a result, Greece has lots of debts that need to be paid, but it cannot afford to borrow commercially and does not have enough money from the first bail-out to pay them.
Why can't Greece just default on its debts?
If Greece were not a member of the eurozone, it might be tempted just to default on its debts, which would mean either declining to make interest payments or insisting that creditors agree to accept lower payments and write off some of the debt.
In the case of Greece, that would present enormous difficulties.
The rates of interest that eurozone governments have to pay have been kept low by the assumption that the European Union and the European Central Bank would provide assistance to eurozone countries to stop them defaulting.
There has been much public opposition to the austerity programme
If that turned out not to be the case, the cost of borrowing for many of the smaller EU states, some of which are already struggling to service their debts, would rise significantly.
It means that if Greece were to default, the Irish Republic and Portugal might have to default as well.
A default would also be bad news for the banks that have loaned large amounts of money to the governments of Portugal, the Irish Republic and Greece.
If all of those banks got into trouble, it would seriously test the resources of the European Central Bank, which has loaned large amounts of money to the banks involved and to the countries themselves.
As long as Europe can afford to help countries avoid a default, it is likely to do so.
So why don't European countries just agree another bail-out?
The trouble is that the German government wants banks to share some of the pain from the second bail-out.
That would mean that instead of the Greek government borrowing money from the EU to pay maturing debt, the banks would just have to agree to renew the debt, probably on favourable terms for Greece.
The French government and the European Central Bank have warned that such a debt restructuring would be considered by many as a default, which would further delay the day when Greece can borrow commercially again.
European governments may be influenced by the amount of debt their own banks have lent to Greece.
The ratings agency Moody's has said it may downgrade France's three biggest banks because of their exposure to Greece.
Could the crisis spread?
If Greece defaults, then the problems could well spread to Portugal and the Irish Republic.
Without a default, there could still be problems, because the bail-outs for Portugal and the Irish Republic were designed to tide both countries over until they could borrow commercially again, just as was hoped for Greece.
If that hasn't been possible in Greece, investors may question whether the same solution will work for the other two bail-out recipients.
The real problem is what happens to Spain, which has seen its own borrowing costs rising recently.
The Spanish economy is as big as Greece, Portugal and the Irish Republic put together and the European Union would struggle to bail it out if that became necessary.
What does all this mean to the UK?
According to figures from the Bank of International Settlements, UK banks hold a relatively small $3.4bn worth of Greek sovereign debt - as against banks in Germany, which hold $22.6bn, and France, which hold $15bn. When you add in other forms of Greek debt, such as lending to private banks, those figures rise to $14.6bn for the UK, $34bn for Germany and $56.7bn for France.
However, since a Greek default would have such a big knock-on effect for other troubled European economies, it would exacerbate the UK's exposure to Irish debt, which is rather larger.
At the moment, it is all but impossible to calculate the size of any future cost to UK taxpayers arising from another Greek bail-out. The UK's current liability is a mere $1.9bn, which is the cost of its part in the IMF's loan to Greece. But any further support from the IMF, or from non-eurozone EU members, would obviously swell the cost.
The measures have been somewhat unpopular with many voters
The Greek parliament is debating the latest set of austerity measures, which it needs to pass to qualify for another payment under the bail-out from the European Union and the International Monetary Fund.
The five-year plan was changed last week to allow for more money to be raised through tax increases and less money to be saved through spending cuts.
The plan involves cutting 14.32bn euros ($20.50bn; £12.82bn) of public spending, while raising 14.09bn euros in taxes over five years.
These are some of the austerity measures planned.
TAXATION
Taxes will increase by 2.32bn euros this year, with additional taxes of 3.38bn euros in 2012, 152m euros in 2013 and 699m euros in 2014.
A solidarity levy of between 1% and 5% of income will be levied on households to raise 1.38bn euros.
The tax-free threshold for income tax will be lowered from 12,000 to 8,000 euros.
There will be higher property taxes
VAT rates are to rise: the 19% rate will increase to 23%, 11% becomes 13%, and 5.5% will increase to 6.5%.
The VAT rate for restaurants and bars will rise to 23% from 13%.
Luxury levies will be introduced on yachts, pools and cars.
Some tax exemptions will be scrapped
Excise taxes on fuel, cigarettes and alcohol will rise by one third.
Special levies on profitable firms, high-value properties and people with high incomes will be introduced.
PUBLIC SECTOR CUTS
The public sector wage bill will be cut by 770m euros in 2011, 600m euros in 2012, 448m euros in 2013, 300m euros in 2014 and 71m euros in 2015.
Nominal public sector wages will be cut by 15%.
Wages of employees of state-owned enterprises will be cut by 30% and there will be a cap on wages and bonuses.
All temporary contracts for public sector workers will be terminated.
Only one in 10 civil servants retiring this year will be replaced and only one in 5 in coming years.
SPENDING CUTS
Defence spending will be cut by 200m euros in 2012, and by 333m euros each year from 2013 to 2015.
Health spending will be cut by 310m euros this year and a further 1.81bn euros in 2012-2015, mainly by lowering regulated prices for drugs.
Public investment will be cut by 850m euros this year.
Subsidies for local government will be reduced.
Education spending will be cut by closing or merging 1,976 schools.
CUTTING BENEFITS
Social security will be cut by 1.09bn euros this year, 1.28bn euros in 2012, 1.03bn euros in 2013, 1.01bn euros in 2014 and 700m euros in 2015.
There will be more means-testing and some benefits will be cut.
The government hopes to collect more social security contributions by cracking down on evasion and undeclared work.
The statutory retirement age will be raised to 65, 40 years of work will be needed for a full pension and benefits will be linked more closely to lifetime contributions.
PRIVATISATION
The government aims to raise 50bn euros from privatisations by 2015, including:
Selling stakes this year in the betting monopoly OPAP, the lender Hellenic Postbank, port operators Piraeus Port and Thessaloniki Port as well as Thessaloniki Water.
It has agreed to sell 10% of Hellenic Telecom to Deutsche Telekom for about 400m euros.
Next year, the government plans to sell stakes in Athens Water, refiner Hellenic Petroleum, electricity utility PPC, lender ATEbank as well as ports, airports, motorway concessions, state land and mining rights.
It plans further sales to raise 7bn euros in 2013, 13bn euros in 2014 and 15bn euros in 2015.
Sources: Reuters, Greek Ministry of Finance Economic Policy Programme Newsletter
1 August 2011 Last updated at 15:48 GMT BBC NewsBusiness
Shares fall as US debt-deal relief rally fizzles out
Wall Street went into reverse as initial optimism over an agreement to raise the US debt limit fizzled out.
The Dow Jones index, having opened sharply higher, was down 0.5% within an hour of the start of trading.
European bourses also fell, with the FTSE 100 down 0.4% and the main indexes in France and Germany down 2%.
News that President Barack Obama and Congressional leaders reached a deal to raise the US debt ceiling initially boosted markets in Asia and Europe.
But in America, a relief rally at the start of trading on Wall Street faded as investors digested data showing that US economic growth was much weaker than first thought.
The Dow Jones and S&P 500 indexes had opened almost 1% up.
There was also data pointing to stagnant factory growth in China and the eurozone, prompting concerns about the strength of the global economic recovery.
Although the debt deal still needs approval from Congress, with a vote due on Monday, there had been widespread relief that the US will be able to raise its debt limit and avoid a default.
Stock markets across the globe became volatile recently when it looked as if an agreement between the Democrats and Republicans might not come through before the 2 August deadline.
The US dollar rose sharply against the Japanese yen, hitting 78 per dollar before retreating to 77.63, still some 0.3% higher.
Crude oil for September delivery was up a dollar at $96.69 a barrel on the New York Mercantile Exchange.
Gold prices fell sharply to $1,619 an ounce, down from a record high of $1,628 an ounce on Friday.
Gold and the Japanese yen have been gaining in recent weeks as investors bet that they were less risky than many other assets.
Future risks
However, analysts have warned that there are still risks for the US economy and investors will be closely monitoring jobs numbers due out on Friday.
"If the figures disappoint, we could see equity markets come under pressure again," said financial service provider Phillips Futures.
This view was underlined by Daiwa Capital Market's Mr Basu who added that slow jobs growth "would continue to show that the labour market is a deterrent to US recovery".
Fears about the strength of the US economy were fanned last week when growth numbers came in much lower than anticipated.
US President Barack Obama looked to allay concerns that the spending cuts of $1tn over 10 years he announced would impact the economy.
He said that those cuts would not happen too quickly and would not drag down the fragile US economy.
England riots: Government mulls social media controls
Curbs on social media and texting are being considered by the government.
The government is exploring whether to turn off social networks or stop people texting during times of social unrest.
David Cameron said the intelligence services and the police were exploring whether it was "right and possible" to cut off those plotting violence.
Texting and Blackberry Messenger are said to have been used by some during this week's riots.
Rights groups said such a measure would be abused and hit the civil liberties of people who have done nothing wrong.
The prime minister told MPs the government was exploring the turn-off in a statement made to the House of Commons during an emergency recall of Parliament.
Mr Cameron said anyone watching the riots would be "struck by how they were organised via social media".
He said the government, using input from the police, intelligence services and industry, was looking at whether there should, or could, be limits on social media if it was being used to spread disorder.
Under social media, Mr Cameron includes Facebook, Twitter and specific technologies such as text messaging. The semi-private BBM messaging system on the Blackberry is said to have been widely used during the riots.
Home Secretary Theresa May is believed to be meeting representatives from Facebook, Twitter and RIM (maker of the Blackberry) to talk about their obligations during times of unrest.
Civil liberty implications
In the statement, Mr Cameron said law enforcement was considering "whether it would be right to stop people communicating via these websites and services when we know they are plotting violence, disorder and criminality".
Questions about the technical feasibility and civil liberty implications of cutting off networks have been raised within the coalition, with many expressing scepticism about the proposal's workability.
Rights campaigners also criticised the idea. Jim Killock, director of the Open Rights Group, said events like the UK riots were often used to attack civil liberties.
He questioned who was going to decide whether texts or tweets were an incitement to disorder.
"How do people 'know' when someone is planning to riot? Who makes that judgement?" he asked.
"The only realistic answer is the courts must judge. If court procedures are not used, then we will quickly see abuses by private companies and police."
Any government policy to shut down networks deprived citizens of a right to secure communication and undermined the privacy required by a society that valued free speech, he said.
"David Cameron must be careful not to attack these fundamental needs because of concerns about the actions of a small minority," he said.
John Bassett, a former senior official at GCHQ and now a senior fellow at the Royal United Services Institute, told Reuters that the government should resist a clampdown.
"The use of social media in the unrest looks like a game-changer," he said. "But any attempt to exert state control over social media looks likely to fail."
Far better, he said, would be to encourage community groups and individuals to report when they see disorder brewing online and ensure police have the tools to extract intelligence from social media.