A poorly-explained and draconian law demanding tougher earthquake-proofing of new buildings has triggered an unprecedented collapse in the Japanese construction market and, say economists, threatens to push the country into technical recession.

Rushed into law in the wake of a scandal over faked quake-resistance data that erupted last year, the new building regulations have, overnight, created a crisis for commercial, residential and public works construction projects across the country.

Housing starts in Japan plunged 44 per cent in September, continuing the crash that began with a 43 per cent fall in August. Commercial building starts nosedived by around 25 per cent in September as the new law and a lack of information sowed total confusion among construction companies.

The grim figures were released on the same day that the Bank of Japan finally admitted what analysts have been saying for months: that the country has still not managed to beat deflation. The central bank also revised down its growth forecasts for the current financial year and for fiscal 2008, acknowledging the possibility of a negative quarter of growth in the current quarter and a return to technical recession.

But the housing starts crisis has landed a massive and unpredicted blow to Japan’s economy and broken, said SG Securities economist Glenn Maguire, the “virtuous circle” that had been driving the country’s fragile recovery.

The complex law effectively forces builders to submit new plans to the Ministry of Land, Infrastructure and Transport for projects already in train or on the horizon. But the Government failed to anticipate the workload and allocated no extra resources to the task of processing the newly submitted applications and sending inspectors to re-assess existing projects under construction.

Mired in delays, and the risk that existing projects will now be disapproved by the Government, construction companies and property developers have simply stopped building anything at all.

Hiroshi Shiraishi, an economist at Lehman Brothers said that the single law had effectively destroyed an entire, vital segment of the economy. Construction represents around 3.5 per cent of Japan’s GDP, and is expected to produce a knock-on effect throughout many sectors of the economy in coming months as demand for furniture, construction materials and home and office fittings dissolves.

Describing the law as “ridiculous” he added that the move was “a big mess and typical of a government that sets policy and makes laws with no consideration of the macro-economic impact of what it is doing.”

Realising the spectacular ill-effects of the new earthquake-proofing law, the Government has hinted that it will hastily relax the regulations in an effort to resurrect the construction industry. Analysts do believe that the market will eventually return to normal, but said that it will take many months to do so. In the meantime, say economists, the crisis could leave a 0.4 per cent dent in third quarter GDP numbers.

“It is extraordinary to watch the Government trigger the collapse of an entire sector of the economy with the stroke of a pen,” said Macquarie’s chief Japan economist, Richard Jerram.

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