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How will Japanese recession affect U.S. recovery?

L.A. and Long Beach ports handle about a fourth of the trade between the U.S. and Japan, which is in recession

Japan's unexpected fall into recession — the latest stumble for its long-struggling economy — poses another obstacle to the U.S. recovery and demonstrates the problems many key nations still are having regaining their economic footing after the Great Recession.

A major trading partner for the U.S. and California, Japan now has had four recessions since the 2008 financial crisis.

The latest one to hit the world's third-largest economy comes amid fears that another recession is looming in Europe that could sap even more foreign demand for U.S. products.

"Much like with Europe, if they really went into a tailspin, that would damage an already fragile global economy," said Gary Schlossberg, senior economist at Wells Capital Management.

He and other experts expect a short and shallow Japanese recession that will be over by the end of the year. Also, any harm to the U.S. should be limited, they said, because China and other nations have become more important trading partners over the last two decades.

Still, Monday's surprising news from Tokyo was a discouraging sign for U.S. companies and Obama administration officials hoping to increase exports.

For Southern California, a decline in trade could hit the region hard. Japan has been the No. 1 source of foreign direct investment into Los Angeles County this year and the second-largest trading partner for the area, according to a the Los Angeles County Economic Development Corp.

The ports of Los Angeles and Long Beach handle about a quarter of the total trade between the U.S. and Japan.

"This is a big trading partner for us and how they do is going to affect us," said Jerry Nickelsburg, senior economist at the UCLA Anderson Forecast, which tracks the California and U.S. economies.

"California exports electronics and machinery to Japan, so the health of the Japanese economy is certainly important to California manufacturers," Nickelsburg said.

Two years after Shinzo Abe won election as prime minister on a pledge to turn the economy around, Japan seemed poised on a road to recovery from decades of stagnation and deflation.

Abe's formula, dubbed Abenomics, relied on government spending and a bond-buying program by the Bank of Japan, the nation's central bank, an economic stimulus similar to the Federal Reserve's purchases that ended this fall.

Though bond purchases appeared to work well for the Fed in the U.S., the program fell flat in Japan.

A big reason was the sharp hike in the sales tax last April to 8% from 5%, aimed at reducing the nation's extraordinarily high public debt. Abe blamed the tax hike for staggering the economy, and many experts now believe he'll call off a pending further hike that would take the rate to 10%.

Postponing the planned tax increase would leave Japan's economic recovery depending more on stimulus from the Bank of Japan, said Harumi Taguchi, principal economist for IHS Global Insight in Tokyo.

A delay in the tax increase could boost consumer spending, and a weakening of the yen is likely to increase corporate profits, she said. But unless Japanese workers see wage increases, the economy will remain weak. Still, she expects economic growth to return in the fourth quarter of this year, though "at a sluggish pace."

The tax hike is being blamed by many experts as the prime reason the economy contracted at a 7.3% annual rate in the second quarter this year. Economists expected growth to bounce back in the third quarter at a modest annual growth rate of 2.1%.

Instead, the economy contracted at a 1.6% annual rate in the third quarter. Economists consider two consecutive quarter of contraction to be a recession.

The Japanese government "seriously underestimated the impact the tax increase would have," said Jock O'Connell, an international trade advisor for Beacon Economics, a Los Angeles research firm.

The impact should be limited if the recession is just a short-term contraction triggered by the tax increase, he said. But there could be more problems if the recession feeds well-embedded consumer expectations of flat to falling prices, which would add to the propensity of the Japanese to save.

Japan's Nikkei 225 stock market index slumped nearly 3% on Monday. But other global markets shrugged off the news, an indication of the low expectations that surround the Japanese economy after two decades of troubles.

The Dow Jones industrial average dropped at the open but recovered to edge up 13.01 points to 17,647.75. The Standard & Poor's 500 index rose to 2,041.32, a record high.

"Japan has been in a funk for the longest period, and this is a development that probably can easily be absorbed by the world economy, including the U.S.," said John Lonski, an analyst with Moody's Analytics.

But Japan still plays a key role worldwide.

It is the fourth-largest U.S. trading partner, with exports and imports totaling $150 billion through Sept. 30, according to Commerce Department data. That's 5.1% of all U.S. trade activity, down from about 8% a decade ago.

Japan plays a larger role in the California economy.

It's the state's fourth-largest export market, accounting for $12.7 billion last year, or about 7.6% of the state's exports, a drop of 2.3% from the previous year. Japan is the second-largest importer into California, accounting for 10% of all imports last year.

Total Japanese trade flowing through Southern California ports has dropped this year by 11% at the Port of Long Beach and 1% at the Port of Los Angeles, according to WorldCity Inc., a Coral Gables, Fla., research firm.

Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto, said the U.S. is much less dependent on Japan than it was two decades ago.

"In the early '90s on the world scene, there was no Brazil, there was no India and there was no China," he said. "Japan played a much more important role."

jim.puzzanghera@latimes.com

dean.starkman@latimes.com

Puzzanghera reported from Washington; Starkman from New York.

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