Japan economy returns to recession

Published: Monday 17th November 2014 by The News Editor

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Japan reported today that its economy contracted at a real annual rate of 1.6% in July-September, in a second straight quarterly decline that returned the country to recession.

A 24.1% plunge in private residential investment from a year earlier failed to offset a modest recovery in exports and a 1.5% increase in household spending.

Most economists had forecast that the world’s third-biggest economy would expand at about a 2% pace. The negative growth figure was much lower than expected and makes it very likely Prime Minister Shinzo Abe will delay implementation of a sales tax rise planned for October, 2015.

The economy contracted 7.1% in April-June after the national sales tax was raised to 8% from 5%. The decline in July-September represented a 0.4% decrease from the previous quarter.

The release today of the preliminary quarterly economic data, normally a routine event, was received with far more attention than usual since Mr Abe is expected to make the dismal GDP reading the basis for calling a general election.

“In light of the sharp fall in today’s preliminary estimate, it now looks likely that (Prime Minister) Abe will call off the hike and announce snap elections,” economist Marcel Thieliant of Capital Economics said.

The benchmark Nikkei 225 stock index dropped 1.4% in its first hour of trading.

A recession is commonly regarded as two straight quarters of economic contraction. Japan emerged from its last recession in late 2012, just as Mr Abe took office pledging to restore the country’s economic vigour.

In calling the snap election, Mr Abe wants a renewed mandate for his “Abenomics” policies aimed at revitalising the economy through lavish injections of cash into the economy by the central bank, strong public spending and reforms intended to improve the country’s waning economic competitiveness.

Tax increases are crucial for getting Japan’s battered government finances into better shape, and putting off the rise slated for next year carries some risk that financial markets may doubt Japan’s resolve to restore its ailing public finances.

After many years of deficit spending the total public debt is more than twice the size of the economy and the largest among developed nations.

But Mr Abe and his advisers appear to view the threat to Japan’s recovery, which has limped along since the April 1 increase in the sales tax to 8% from 5%, as the more urgent risk.

Critics say Mr Abe has failed to deliver on promises for drastic reforms of labour regulations, the tax system and the health industry, among other areas. Meanwhile, companies have largely refrained from passing windfall gains from share price gains and surging profits on to their workers in the form of higher wages.

The extreme monetary easing by the Bank of Japan has helped drive the value of the Japanese yen to seven-year lows against the US dollar, pushing up costs for imported food and fuel in the resource-scarce country.

Meanwhile, household spending has remained lacklustre, as families and small companies tightened belts to meet higher costs.

Published: Monday 17th November 2014 by The News Editor

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