Japan: two lost decades? | FT Alphaville

Japan: two lost decades?

So the bad, bad news out of Japan is that its latest GDP figures are the worst ever – an annualised plunge of more than 15 per cent and a quarterly 4 per cent fall. The good news, according to some economists, is that this could be rock bottom and it’s up, up and away from here.


As the FT reports on Wednesday:

Japan’s economy contracted by a record 4 per cent quarter-on-quarter in the first three months of this year as domestic demand declined and an export rout continued, official data showed on Wednesday. The decline in GDP equivalent to a extraordinary 15.2 per cent fall on an annualised basis – highlighted the woes facing the world’s second largest economy, which has now contracted for a record four quarters in a row.

However, with government spending growing, inventories falling and exports expected to stabilise after falling a record 26 per cent between January and March, many analysts believe that the worst is over and the economy may already have returned to growth in the current quarter.

Well, many of us have been here before and know that it can get a whole lot worse before it gets better.

In fact, my colleague Louise Lucas in the FTs Tokyo bureau, who writes Lex notes from Asia, has just calculated that the latest miserable figures take Japan’s nominal GDP back to what it was in 1992. While the economy actually grew in Japan’s so-called “lost decade”, the economic “recovery” phase seems to have taken it very firmly backwards.

As for where it all goes from here:

“There’s no doubt that Japan’s GDP figures are the worst ever, so it’s too early to say the economy has bottomed out,” Toshihio Sakai, head of forex trading and financial products at MUFJ Trust and Banking, told Bloomberg on Wednesday, predicting that a possible prolonging of global recession would lead to “safe haven” buying of both the yen and the dollar.

Indeed, the yen was already showing signs of strengthening against the dollar on Wednesday afternoon in Tokyo, trading around Y95.58 against Y96.16 before morning publication of the GDP figures.

Economists had widely predicted a slightly worse plunge than the annualised 15.2 per cent. But any sense that the actual figures were better than expected was offset by a downward revision to fourth-quarter figures from 2008 (from -12.1 per cent to -14.4 per cent), noted Richard Jerram of Macquarie Securities Japan.

Essentially, says Jerram:

Real GDP is back to where it was in 2003 and nominal GDP is the lowest since 1992. The release illustrated the rise in the savings rate that has compounded the shock from exports. The economy is again sliding into deflation.

There’s a reasonably high margin for error when the economy is moving this quickly, he notes, but the actual numbers were roughly in line with consensus expectations. As expected, the major damage came from net exports, private investment, housing and consumer spending.Behind the numbers, forget the talk of inventory adjustment.

Changes in private sector inventories only accounted for a fraction of the 15.2 per cent drop in GDP – because the adjustment is mainly in inventories held overseas, the effect is seen in the export data, notes Jerram. Having made a negative contribution of 10.7ppt in Q4 2008, net exports further cut GDP by 8.1ppt in the 2009 first quarter. This, he says, “should be the main source of growth in 2Q09”.

In Jerram’s view, Japan’s economic recovery begins in the second quarter. But – surprise surprise – it’s “going to be a long, hard slog”. With the output gap now at around 9 per cent of GDP, the implied deflation risk is “severe”, he notes.

Private consumption – as the government’s massive tax cut and fiscal expansion plans take hold – offers some hope of a boost to final demand, “as long as the current panic over swine flu does not make the population hide under their futons”, he adds. “Most of the Y2,000bn income tax cut will be received in the current quarter, but the prospects of a lower savings rate are more intriguing”.

JPMorgan’s Masamichi Adachi, meanwhile, predicts a “fragile” recovery trend in the second half, saying that while plunge in real GDP was no surprise, the figures reconfirmed the severity of Japan’s downturn:

Looking ahead, we expect that the private consumption and public investment that are supported by fiscal stimulus will boost domestic final demand, while external demand will pick up gradually. Therefore, real GDP is likely to increase in the second half, even as inventory adjustment continues. But, with uncertainty over private demand (particularly over consumption), the recovery path looks fragile.

Jesper Koll, of hedge fund adviser TRJ Tantallon Research Japan, is also in the “upwards-from-here” camp, telling Bloomberg: “We basically bottomed out”. But even Koll notes: “On the consumer spending side you’ve got a very clear negative from the severe labor market adjustment.”

Bloomberg’s report however leaves us with the impression that the bulls may be a bit ahead of themselves, noting:

Still, the failure of export demand to do better than simply stabilize will probably limit the scope of Japan’s recovery. Toyota, Hitachi, and Panasonic Corp all forecast continued losses in the current business year. Panasonic said last week it plans to close about 20 factories this year and proceed with the 15,000 job cuts announced in February.

As for Lex, the prognosis is even less cheery:

It is tempting to see this as the nadir. Japan’s worst slump since the war – again like Germany – is accompanied by some chirpier signs. Forward leading indicators, including those measuring sentiment, are nudging upwards

 But none of this is necessarily sustainable. Household consumption, down 1.1 per cent quarter-on-quarter, will continue to struggle. Unemployment continues to rise, summer bonuses will reportedly be crimped by more than 10 per cent and the savings rate has already dropped below that of the US. Ditto for private capital expenditure, down 10.4 per cent quarter-on-quarter, given the sea of red ink at manufacturers and depressed utilisation rates.

Japan may indeed have touched bottom; with nominal GDP now back at 1992 levels, it must be hoped that it has. But it will be a long haul back out. 

Related links:
Japan’s economy shrinks record 4 per cent – FT
Japan economy shrinks record 15.2% as exports, spending plunge – Bloomberg
Japan’s first quarter – Lex