A poorly explained and draconian law demanding tougher earthquake-proofing of new buildings has triggered an unprecedented slump in Japan’s construction market and may push the country into technical recession.

The new building rules – rushed into law after a scandal over faked quake-resistance data that erupted last year – have, overnight, created a crisis for commercial, residential and public works construction projects across Japan.

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

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

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

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. However, the Government failed to foresee the workload and allocated no extra resources to the task of processing new applications and sending inspectors to review existing projects under construction.

Mired in delays, and the risk that existing projects will be “disapproved” by the Government, building companies and property developers have stopped building anything.

Hiroshi Shiraishi, an economist with Lehman Brothers, said that the law had effectively destroyed an entire segment of the economy. Construction represents about 3.5 per cent of Japan’s gross domestic product and a knock-on effect is expected in many sectors as demand for furniture, construction materials and home and office fittings dissolves. Describing the law as “ridiculous”, Mr Shiraishi said 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”.

Realising the ill-effects of the earthquake-proofing law, the Government has hinted that it will relax the regulations to try to resurrect the construction industry. Analysts expect the market to return to normal, but said that it would take many months. Meanwhile, economists say, the crisis could cut third-quarter GDP by 0.4 per cent.

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

Tremors

— The largest recorded earthquake in the world was of a magnitude of 9.5 in Chile on May 22, 1960

— There are 500,000 detectable earthquakes in the world each year, 100,000 of which can be felt and 100 of which cause damage

— The cause of earthquakes was stated correctly in 1760 by a British engineer, John Michell, when he wrote that earthquakes and the waves of energy that they create were caused by “shifting masses of rock miles below the surface”

— Nick Leeson, the disgraced Barings Bank trader, was brought down after the Nikkei share index fell after the Kobe earthquake on January 17, 1995. The banking business collapsed on February 27

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts