Japan Worries Markets With GDP Contraction

August 17th, 2015 by

japan-recessionThe Asian markets soured on Monday’s announcement that Japan’s gross domestic product (GDP) fell during the second quarter by 1.6%, year-over-year. Shares in the region were mixed but mostly lower, influenced both by Japan’s economic woes and the surprising devaluation of the Chinese yuan last week that is still having an affect on investor sentiment. While much uncertainty surrounds the Chinese situation, the problem in Japan is clear-cut, though no less worrisome: Japanese consumers aren’t spending, and exports have been drying up.

Depths of the Problem

As bad as the Q2 numbers were for the Japanese economy, analysts actually expected an even worse outcome for the world’s third-largest economy. Although the 0.4% quarterly contraction and 1.6% drop year-over-year were below expectations of -0.5% and -1.9%, respectively, this hardly softens the blow of the data. Japan may have experienced two quarters of growth in Q4 2014 and Q1 2015, but that followed two consecutive quarters of contraction (the technical definition of a recession). If nothing else, Japan has struggled to string together any consistent growth.

japanConsumer spending fell by a hefty 0.8% during Q2, a terrible sign for a country whose consumer expenditures make up a whopping 60% of the national economy. The extensive monetary stimulus that the Bank of Japan has engaged in has sharply devalued the Japanese yen; the currency has returned to over 120 per dollar in terms of exchange rates after strengthening to about 75 yen per dollar as recently as 2012. As the central bank has continued to devalue the currency in order to boost exports, domestic consumption has fallen. Household consumption was down 3.1% in Q2. A weaker yen means that it costs consumers more to buy the same items, which is especially a problem with foodstuffs.

Searching for Solutions

yenOne of the biggest issues that is plaguing Japan is that is has run out of monetary options—those involving manipulating the money supply—to try and goose its economic performance. The Bank of Japan has pumped unprecedented amounts of money into the economy through monetary easing, more commonly called “quantitative easing.” Even after implementing this extreme monetary policy, the economy is still shrinking.

This means that, even if the BoJ insists on pumping more money into the country, it’s really only going to be a drop in the bucket as a portion of the total stimulus over the last 20 years. While the unconventional measure is thought to combat deflation by encouraging inflationary forces, Japan has seen virtually none of these intended results.

The alternative for the BoJ would be fiscal stimulus, which would entail lowering taxes or increasing government spending—in short, using fiscal policy to try and kick-start the economy. This, however, runs contrary to the 60% sales tax hike (from 5% to 8%) instituted during Q2 of last year. Even as corporate revenues rise to all-time highs in Japan, the country is still struggling to attract investment due to its staggering public debt.

Legacy of PM Abe and “Abenomics”

Leader Pelosi and Members of Congressional Delegation Meet JapanJapan’s current prime minister, Shinzo Abe, has been one of the leading proponents of Japan’s economic stimulus programs, earning these forms of monetary easing the monicker “Abenomics.” Abe may find it difficult to garner support for yet another stimulus package, especially when previous measures that were promised to lift the Japanese economy to its former heights have been largely unsuccessful. The country’s economic fate will be central in determining how PM Abe and his administration are viewed by history.