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Japan’s “Unimaginable” Contraction

Well last week Kazuo Momma, head of the Bank of Japan’s research and statistics department, warned that Japan’s economy now faced an “unimaginable” contraction, and today we can begin to see just what the unimaginable might look like, since the preliminary data are for fourth quarter GDP are now out. What we find is when we come to stare the unimaginable in the face is that Japan’s economy contracted by 3.3 per cent in the three months to December when compared with the previous quarter, effectively the country’s worst economic performance in 35 years.

On an annualised basis, gross domestic product declined at a rate of 12.7 per cent, a number which perhaps better than any other highlights the depth and severity of a slump that has surely now dispelled all those early hopes that the global economy might be able to shrug off the effects of the financial crisis just like that. To puts things in a comparative setting, the contraction was three times as bad as that of the US in the same quarter.


This quarters big slide in GDP was in fact the second-worst the country has experienced in modern times, behind only a 3.4 per cent contraction in 1974, following the first Middle East oil shock, and well beyond anything Japan’s economy has experienced in what is now the “lost decade and a half”.


The slowdown was pretty generalised, but lead most decisively by exports which plunged an unprecedented 13.9 percent from the third quarter (see chart below).In fact Japan has become systematically more dependent on sales abroad for growth over the past decade, and overseas shipments make up 16 percent of the economy today compared with about 10 percent in 1999.


Domestic demand, which includes spending by households and companies, made up 0.3 percentage point of the contraction, while capital investment fell 5.3 percent. Manufacturers cut investment spending by a record 11.3 percent in the quarter, indicating they have little need to buy equipment as factories lay idle. Consumer spending, which accounts for more than half of the economy, dropped 0.4 percent on the quater, as exporters began firing workers.

“There’s no doubt that the economy is in its worst state in the postwar period,” Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo. “The Japanese economy, which is heavily dependent on exports of autos, electronics and capital goods, has been severely hit by the global slowdown.”

After ten years of sacrifice and reform, it must be pretty shocking for most Japanese to discover that their economy is still in “terrible shape”.

And The Worst Is Still To Come

Evidence of Japan’s slowdown can now be found right across the economy. On Monday the country’s electric utilities industry association said that power generation had fallen 6.4 per cent in January as the industrial sector rapidly winds down. This was the sixth straight monthly decline and the steepest fall since a 6.9 per cent drop recorded in July 2005. Even Japan’s services sector is suffering, and the The new Japan Services PMI, compiled by Markit on behalf of Nomura and published for the first time on the 4th February, showed the country’s downturn deepening in January. The Nomura/JMMA Manufacturing PMI survey indicated that the goods producing sector contracted at a series record rate in January, in excess of the 22.5% annual decline indicated by official METI data for December, with plummeting export sales leading the sector’s decline. With both manufacturing and service sectors reducing employment at sharp rates in January, consumer confidence – and therefore household spending on both goods and services – looks set to deteriorate further moving into Q1, dragging Japan’s economy deeper into recession.


Japan’s consumers remained at their most pessimistic level in at least 26 years in January (see chart below), indicating households are likely to keep cutting back on spending as the recession deepens. The confidence index nudged up very slightly 26.4 from December’s 26.2, according to the Cabinet Office last week. December’s numbers were the lowest since the government began compiling the figures in 1982.


Originally published at the Global Economy Matters blog and reproduced here with the author’s permission.

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