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Land of the sinking sun?

The Japanese name for Japan is Nippon which is usually translated as “The land of the rising sun.” But at the moment the Japanese government and central bank are probably joining in Elton John’s hit from 1974: “Don’t let the sun go down on me.”

The reason for this is that it has just been announced that Japan’s GDP fell by 3.3% in the final quarter of 2008 which is the biggest drop since 1974. When calibrated to an annual rate the economy was contracting by 12.7%. Kaoru Yosano, Japan’s Economic Minister, said: “This is the worst economic crisis in the post-war era. There is no doubt about it.”

Why is Japan performing so badly at the moment? It is mainly because Japan is so dependent on the sale of its manufactured goods at a time when the bottom has dropped out of the world market. In fact, three percentage points of the 3.3% fall in GDP was due to a fall in net exports. Consumers are currently cutting back on their demand for cars and expensive electronic goods around the world. Although Japanese manufacturers have responded more swiftly than in previous recessions by cutting temporary workers and reducing production they probably have not acted quickly enough.

Normally, companies’ inventories fall during a recession as companies cut back on production and use up their existing stocks. But in the last quarter of 2008 inventories actually rose slightly. Whilst this helped slightly to offset the fall in GDP it shows that output was not being cut aggressively enough and that it will be cut even further to reduce inventories. Forecasters are expecting a similar contraction of around 3% in the current quarter.

Of course, eventually inventories will be run down to virtually nothing and then output will start to go back up as firms restock. But with cutbacks in investment and domestic consumption it will be some time before this comes through into GDP figures. One ongoing problem is the strength of the yen. Whilst sterling has plummeted over the past year, the yen has increased by more than 20% against the dollar. This makes it even more difficult for Japanese companies to export abroad.

Why is the yen not falling? According to Lex in the Financial Times (Tuesday 17th February 2009) the private sector in Japan holds over $1,700bn in net foreign assets. Some of these have been sold in recent months and as individuals as well as companies seek to repatriate assets held abroad this will help keep up the yen’s value.

The outlook is bleak. The government is finding it difficult to get a stimulus package through parliament; the independent Bank of Japan is merely trying to stabilise markets rather than aggressively intervening; and, existing general government gross financial liabilities as a percentage of nominal GDP were already standing at 173% in 2008. This is the largest percentage of any OECD country and compares with 58.7% in the UK and 73.2% in the US.

Altogether this means that Japan is in a very perilous position and some commentators are even mentioning the “D” word – depression. It has already hit former finance minister Shoichi Nakagawa who resigned today after appearing “tired and emotional” at last week’s G7 meeting due to imbibing too many “cold remedies”.

Posted in International, News

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