Sunday, November 8, 2015

Japan Economy Ready To Enter Recession

Japan Faces Increased Export Competition
A recent poll of 19 economists showed that Japan, the world's third largest economy, most likely contracted at an annualized rate of 0.2 percent in the third quarter, following a 1.2 percent contraction in April-June. This means Japan probably slipped into technical recession again in July-September due to a combination of soft external demand, weak private consumption, and a drop in capital spending. A technical recession is defined as two consecutive quarters of economic contraction, while this does not mean the economy is falling off a cliff it does not bode well for those claiming things are on the mend. This is expected to keep policymakers under pressure to put forth additional monetary and fiscal stimulus in the coming months to bolster the flagging economy.
Currently, the Bank of Japan has tried to portray an upbeat attitude towards the future arguing that the economy remains on track for a moderate recovery. The fact is the BOJ remains between a rock and a hard spot even if they are in no mood to ease policy further anytime soon. Many economist point to a China-led global slowdown as a large risk to Japan going forward so it is understandable many eyes are focused on the third-quarter gross domestic product (GDP) data to be released by the Cabinet Office on Nov. 16th. It is clear that Prime Minister Shinzo Abe's government has been tweaking the budget for the current fiscal year to shore up demand, but the size of any additional fiscal stimulus has yet to be make clear.

Yusuke Shimoda, an economist at Japan Research Institute said,  "The economy continued to stall in July-September as business investment weakened while companies tried to shed a pile of inventory."  Shimoda added, "We expect a return to growth in the current quarter on improving corporate profits and household income. But the pace of recovery will be modest as China's slowdown weighs on business and consumer sentiment." As usual the message remains guardedly optimistic that things will soon improve, but reality is growth remains more or less nonexistent. The GDP data is expected to show private consumption, which accounts for about 60 percent of the economy, grew 0.4 percent in July-September, but this was following a 0.7 percent previous quarter decline.

Little help can be seen in external demand where growth likely came to zero, and this is after it shaved 0.3 percentage point off the second-quarter GDP. Another problem is that despite strong business investment and capital spending plans appeared to be in place by the BOJ's tankan quarterly survey, companies have been slow to follow through and raise capital expenditures. Companies have even come under criticism by officials for not picking up the pace. Lack of strong demand and the slowdown in China  are being blamed for capital spending declining about 0.4 percent quarter-on-quarter in July-September,  this makes two straight quarters of declines.

I feel it would be remiss not to again reiterate that Japan would be sitting in far worse shape if it were not for the wealth shifted each year from America to the small island nation. America spends billions each year defending Japan and by purchasing many of the goods the country produces. The massive trade deficit America has with Japan of around 76 billion dollars a year feeds large amounts of money into Japan, without this money the massively indebted nation would face even bigger trouble. Demographics are also a problem, Japan is stuck with an aging and shrinking population that is evermore expensive for the government to provide for. Japan's public debt, now stands at around 230% of its GDP and is the highest in the industrialized world. It is hard to be optimistic about the future of Japan or the yen when confronted with such facts.

Footnote; This is one of several articles I have written about Japan over the years, below are a few others that tend to paint a picture of future economic disruption. Articles on many subjects may be found in my blog archive, thanks for reading, your comments are encouraged.

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