Tokyo’s release of data for Q3 indicated an economic contraction of 1.6 percent. This was unexpected; after the previous quarter revealed a massive contraction of 7 percent, economists predicted a rebound back into positive GDP growth of at least 2 percent. Instead, Japan’s economy has incurred two consecutive quarters of negative GDP growth, thus meeting the technical definition of an economic recession.
Japan’s Prime Minster, Shinzo Abe, was supposed to have engineered a recovery from Japan’s two decades of stagnation and recessions through his economic policies, dubbed Abenomics. Yet, after massive monetary intervention by the Bank of Japan, significant deficit spending and the trashing of Japan’s currency, the Yen, the end result is another recession.
Japan’s recession has led to the calling of new elections in Japan. The repercussions of the recession are not only political. Abenomics was supposed to put Japan back on the path to economic growth, allowing Tokyo to raise sale tax rates so as to begin coping with the nation’s massive structural deficit. With Japan now in recession, any policy measures designed to tackle the nation’s acute fiscal challenges have likely been placed on the back burner indefinitely.
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In the third quarter of 2014 the Japanese economy lost 1.8 percent of its GDP. This exceeds the growth of 1.5 percent in Q1 of 2014. In other words, for the first half of 2014, on a net basis the overall Japanese economy lost about half a percent of its annual GDP.
Some commentators have blamed the decline on specific public policy measures, such as a large increase in the national sales tax in April, which was implemented to cope with Tokyo’s staggering fiscal deficit and public sector debt. However, it seems more likely that the tax increase sparked the growth in GDP in Q1 as shoppers sought to beat the tax increase, rather than depressing consumer demand in Q2.
On balance, the worse than expected Japanese economic data confirms that Japan remains mired in economic stagnation, despite a multiplicity of stimulus measures enacted by various Japanese governments, and most recently by current Prime Minister Shinzo Abe, in addition to loose monetary policies adopted by the Bank of Japan. In the meantime, tensions are rising between Japan and its major trading partner, China. That will only worsen the plight of the Japanese economy.
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Japan’s economy registered modest GDP growth and the highest rate of inflation in five years, according to October’s data. Even with the higher level of price inflation, core inflation may barely exceed an annualized rate of one percent. The Japanese economy has been experiencing an L-shaped recession for the past two decades, with strong deflationary pressures. Accordingly, the Bank of Japan has been pushing for higher inflation, so the recent data is in line with BOJ policy goals.
While some observers are claiming that the recent news shows signs of some positive trends in the long-stagnating Japanese economy, it must be remembered that whatever paltry GDP growth is occurring is a function of the highest national debt to GDP level of any major advanced economy (in excess of 200 percent), while the uptick in exports is facilitated by a deliberate weakening of the yen, a monetary measure that can always be offset by similar steps undertaken by Japan’s competitors in the global marketplace. In addition, Japan’s dismal demographic situation is not getting better, and add in renewed tensions with China over disputed Islands in the East China Sea, and one can discern that the nascent and very tentative upturn in Japanese economic activity is highly fragile.
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