Global Economic Crisis

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.

According to official statistics, the month of February witnessed an overall decline in Japanese exports of 49.4% from exactly a year ago. In other words, in just 12 months Japan’s most crucial economic activity, foreign trade, has been sliced in half as though with a meat clever. This is an astonishingly bad economic figure, however, it actually gets worse when one peruses the details underlying the grim aggregate export numbers. The United States, which remains the single most important market for Japanese products, reduced its imports from Japan by 58%. Exports to Europe declined by 54.7% while shipments to China plunged 39.7%. When it comes to one of the most important and visible Japanese exports, automobiles, the decline was a staggering 70.9%. These figures are not just indicative of a mere global recession; these are the signatures of worldwide economic depression.

As with other somber news emerging with rapidity as the Global Economic Crisis worsens, there remains a remnant among the financial analysts and economic “experts” who creatively “spin” some good news out of this menu of accelerating disaster. “These numbers are not as bad as we thought,” some are saying, while others claim that the rate of contraction of Japan’s exports is receding somewhat. That is actually technically correct; when an economy witnesses a contraction by almost 50% in its export trade in only one year, the mathematical rate of descent must slow down or else in a few months Japan’s exports would be at absolute zero. Putting aside the intellectual acrobatics of those “experts” trying to diminish our perception of how severe the Global Economic Crisis has become, these chilling Japanese trade figures actually send an alarming message to the entire world, only days before the onset of the G20 Summit being held in London.

The export collapse occurring in Japan is a manifestation of the free fall in world trade. In an inter-linked global economy, a massive contraction of Japanese production geared for exports means Tokyo imports much less in terms of intermediate products and commodities that go into the manufacturing of goods that are shipped overseas. It also means Japan has less accumulation of capital. This latter detail is especially vital, for Japanese savers have enabled Tokyo to join with China in being one of the primary purchasers of U.S. government debt. In essence, what is being revealed is a convergence of dire trends. Global trade is shrinking, the U.S. budget deficit is soaring through the roof, while the overseas capital resources essential for financing Washington’s debt are becoming increasingly scarce in proportion with the diminution in global trade. In essence, as U.S. consumers purchase fewer goods from Japan and China, Tokyo and Beijing are left with a much-reduced capacity to loan Uncle Sam the credit he is now addicted to.

The global economic and fiscal model that currently exists, in the context of collapsing export trade from major sources of credit for the United States, as is the case with Japan, is unsustainable. Will the politicians and their coterie of economic and financial experts realize this fundamental truth and formulate sound policy responses before the entire global economy has fallen into the abyss? Based on their track record to date, I don’t see solid grounds for optimism. What does appear more likely is that the worst is yet to come, and Japan’s trade figures are only a foreshadowing of deeper global economic doom.