Japan is Officially in a Recession

Figures released on Wednesday in Japan say the country is officially in a recession. Prime Minister Koizumi, who has been credited with last year’s 2.6% GDP growth, tried to apply some spin, calling the current period of consolidation “protracted.” Second quarter 2004 saw the economy of Japan shrink (or grow negatively as economists would have it) 0.2% of GDP. Third quarter shrinkage was 0.3%, and the fourth quarter decline was 0.1%. This won’t quite wipe out the 1.7% positive growth in the first quarter, but that was nine months ago. The recession is on.

As noted in the February 16 issue of this journal when discussing similar trouble in Germany, economists define a recession as two consecutive quarters of shrinking GDP. Japan just completed its third such quarter, although there was some hope that second quarter results might be revised to make the problem go away, at least in a technical sense. Instead, Japan has made almost no progress at all since March.

Unlike a lot of politicians, the Prime Minister has over-delivered on his economic promises. In October 2003, he dissolved the Diet and held new elections promising a 2% rate of growth. This was seen as ambitious, given the rather miserable performance of the Japanese economy in the preceding decade. Yet, in 2004, he topped his own targets. So, it isn’t the case that the PM is incompetent, or even that his economic strategy is a failure. Rather, this is a period of consolidation, and it is going on rather longer than one might have wished -- just as he said.

At the same time, the Bank of Japan and the tax authorities in Japan are both considering implementation of precisely the wrong policies. The BoJ, which has held interest rates at effectively 0% for ages, is talking about tightening. And the tax collectors, who in Japan are unfortunately free of democratic supervision, are aiming at higher taxes. This would, as any good Keynesian knows, strangle any recover this quarter in its cradle.

Japan’s one bright spot is foreign orders for machinery. China’s boom and America’s addiction to imports helped Japan set a record for export machinery orders last quarter. This is a structural situation in Japan. If exports weaken, current rates of mild negative growth will start to look good. Two of the three largest economies in the world are in recession. This is not the time to worry about global inflation, higher rates to defend currencies or expanding protectionism.

© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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