Global Economic Crisis

Following in the wake of Standard & Poor’s downgrade of U.S. government debt, Moody’s Investors Service lowered its rating of Japan’s debt by a notch, now sitting at Aa3. Japan is the most indebted major advanced economy, with a government debt to GDP ratio in the range of 200 percent. In addition to the severe natural disasters that have hit Japan this year, Moody’s stated that, “over the past five years, frequent changes in administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies.”

Japan is the third largest economy in the world, only recently slightly eclipsed by China, which is now number 2 in terms of GDP. Though Japan also has large external assets that in part offset its massive sovereign debt (including U.S. Treasuries!), its worsening demographic situation along with government paralysis  creates a grim trajectory for its sovereign debt. The Moody’s rating downgrade, on top of S&P lowering its rating on U.S. government debt, tied in with the worsening debt crisis in Europe, points to an escalation in the global sovereign debt crisis, with economic ramifications that can only be highly negative.

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Tokyo has reported its second consecutive quarter of negative GDP growth, meeting the technical definition of an economic recession. Undoubtedly, the recent earthquake, tsunami and nuclear disaster exacerbated Japan’s already weak economic performance. Nonetheless, the trends were already bleak, but clearly are weaker in the wake of the recent disasters.

In the first quarter of 2011, the Japanese economy contracted at an annual rate of 3.7 percent. The return to recession in the world’s third largest economy will undoubtedly have negative repercussions  on the trajectory of the overall global economic crisis. Furthermore, Japan already has the largest ratio of public debt to GDP of any advanced economy. The borrowing requirements of Tokyo are being further expanded due to the cost of reconstruction stemming form the earthquake and tsunami. A weakened economy coinciding with a worsening public debt crisis does not portend towards a positive overall outlook for the Japanese economy.

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Japan, now the third largest economy in the world (China has recently assumed the spot of number two) is continuing to accrue worrying economic metrics.  For the first time in nearly two years, export-dependent Japan incurred a trade deficit. According to Tokyo, the nation incurred a $5.7 billion negative trade balance in January. The trade figures, however, were not the only troubling development on  Japan’s economic front.

Moody’s has just lowered Japan’s debt rating from stable to negative. This comes in the wake of Standard & Poor’s downgrading Japanese public debt from AA to AA-.  Japan has the developed world’s highest  ratio of public debt to GDP, a figure approaching 200 percent. These recent developments portend the growing risk of a sovereign debt crisis confronting Tokyo.  A growing number of investment fund managers are warning that the current trajectory of Japan’s public debt and annual government deficits is unsustainable. Could Japan become the Greece and Ireland of the Far East? These negative metrics, in conjunction with Japan’s aging  and declining population, point to a deepening economic and fiscal crisis for the land of the rising sun.

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Japan’s economy is in very deep crisis. The latest figures, reflecting economic performance from the April-June period, reveal official growth at a mere 0.1 percent, according to Japan’s Cabinet Office. This is far worse than even the miserable 0.6 percent that had been forecasted by economists.

The Q2 figures show that Japan is effectively back in an L shaped recession, plagued by domestic price deflation, shrinking internal demand despite massive debt-financed stimulus spending by the government, coupled to an export-killing appreciation in the value of the yen. In sum total, the world’s 2nd or 3rd largest economy (depending on how much trust one has in official Chinese government GDP statistics) is in a terrible state. And that is without even factoring in the growing probability that Tokyo will face a severe sovereign fiscal crisis. That is no mere conjecture; Japan’s prime minister has already warned that his country could face a public debt catastrophe as severe as in Greece.

If Japan is in dire economic straits, it is clear that the global economic crisis  is far from ending.

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When Japan’s political leadership reported that their economy had grown by 4.8 % in the third quarter of 2009, the business media throughout the world proclaimed that the second largest economy on the planet had emerged from recession with flying colors. After all, a growth rate of almost 5% is nothing to sneeze at. Too bad that when it came to correct its Q3 numbers, Japan revealed that its statisticians had massively over-estimated the pace of their economy’s recovery. The revised Q3 number is actually a miserable 1.3% annualized growth.

There are two lessons from this statistical embarrassment to be scrutinized. In the first place, Japan’s economic output grew over the 3 months of  Q3 by a meaningless .3%, which computes to an annualized 1.3%. This imperceptible level of growth follows a massive contraction in the Japanese economy, and came about only after a significant infusion of borrowed money as part of Japan’s economic stimulus program. Secondly, the difference between an actual 1.3% and imaginary 4.8% growth rate is so huge, especially in an economy as large as Japan’s, that this anomaly is no mere mathematical rounding error. Either Tokyo’s statisticians are egregiously incompetent, or the numbers were manipulated for reasons of political expediency.

In the same light, it is wise to be sceptical regarding all official claims regarding GDP quarterly growth and unemployment rates stemming from major economies impacted by the global economic crisis.

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Japan’s Finance Ministry has released trade figures for August, and is spinning a massive contraction in exports as “good” news. Well, perhaps Tokyo believes the latest data is evidence of good news, as imports declined even more, creating a modest trade surplus. However, the reality both figures present is that global trade remains weak, hardly an auspicious indicator of an end to the global economic crisis.

In August, Japan’s exports declined by 36% from August of 2008. Looking at the export figures in detail, shipments to the United States declined by 34.4%; to China by 27.6% and to the European Union by 45.9%. In spite of the clear collapse of Japan’s export machine, Tokyo still reported GDP growth in the last quarter, evidence that the recession has ended in Japan, or so the Finance Ministry would lead one to believe. However, those GDP growth figures only exist due to massive pump-priming by the government, which presides over the largest sovereign debt in the world, measured as a proportion of GDP.

In other negative signs that Japan’s economy remains moribund, the nation’s largest  air carrier, Japan Airlines, in on the verge of bankruptcy. JAL is on its knees, appealing to the new government in Tokyo to provide a bailout. It will be interesting to see if the new political power center in Tokyo will abide by its campaign promise to restrict corporate welfare in exchange for more public welfare, or cave in to the prospect of a major corporate failure.

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Much reference is made to the L shaped Japanese recession of the 1990s, and the mistakes supposedly committed by Tokyo in its policy response to that prolonged period of stagnation, as justification for the frenzied pump-priming and corporate bailouts being enacted by frantic policy makers. Yet the Q4 figures from Japan are far worse than the quantitative measurements that reflected the dismal economic performance in Japan during the 1990s. Most importantly, Japan did not have the banking quandaries and low savings rate that precipitated the current Global Economic Crisis in the United States, which has now spread throughout the world. It appears that there is much more to the Japanese economic contraction now and in the 1990s than the sound bites being proffered by politicians and technocrats as justification for their wild orgy of deficit spending.

The truth about the Japanese stagnation of the 1990s is that it stemmed from massive asset bubbles, particularly in the real estate sector, as well as with Japanese equities. Though policy makers in the U.S. U.K. and Eurozone make reference to a lack of vigorous response by Tokyo in that period, the fact is that the Japanese government engaged in massive deficit spending in a futile measure to stimulate a stagnant economy. Ultimately, what little growth eventually returned to Japan’s economy stemmed from a rise in exports, fed by growth in other major economies. All the massive Japanese deficit spending accomplished was to drive up the national debt, though unlike the United States, the Japanese are a nation of individual savers. This meant that Japan had much more flexibility to engage in fiscal stimulus spending, in comparison to the U.S. with its negative savings rate.

We are now, however, experiencing massive global demand destruction stemming from the worldwide economic crisis. The second largest economy in the world is so highly dependent on exports, a major contraction in global demand inevitably will cripple it with a vengeance. The contraction is occurring so rapidly and dramatically, it negates any option of replacing export shrinkage with higher domestic demand. As in the 1990s, all the deficit spending in the world Tokyo may engage in will fail to arrest the grave economic crisis that has now gripped the Japanese economy.

If Japan is in depression, how can the United States be only in a recession? If past deficit spending failed to reverse macroeconomic trends in Japan stemming from irrational asset bubbles, how can replication of such an ineffective fiscal response reverse the Global Economic Crisis, especially in regards to the United States? It seems that the policy makers in Washington have drawn all the wrong conclusions from the Japanese experience of the 1990s, and appear doomed to follow Tokyo’s lead into massive economic contraction at levels that are clearly symptomatic of a severe, protracted economic depression.

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