Rising Sun?

Is Japan in a recession?

JAPAN

Source: Wikipedia

It is if you believe the most recent news. Japan’s economy contracted last quarter, after falling the quarter before that. Two successive quarters of declining GDP are usually enough to be considered a recession. The bad news led Prime Minister Shinzo Abe to delay another sales tax hike scheduled for next year, and to call for new parliamentary elections as a sort-of national referendum on his economic policies, “Abenomics.”

But if this is a recession, it’s unlike most downturns. Their unemployment rate is currently 3.6% down from 4.1% a year ago and one of the lowest in the world.

FRED

Source: FRED

The recent bad economic news was probably caused by an inventory correction, not fundamental economic weakness.

Abenomics is a combination of fiscal stimulus, monetary easing, and structural reforms. The last sales tax increase was supposed to assure the bond market that Japan had the will to address its gargantuan accumulated debt, currently 230% of its economy. But the tax hike caused consumers first to accelerate purchases, then defer them, and now for producers to cut their inventories. No matter where the economy is, people respond to incentives. It’s not enough to deflate the currency. Japanese taxes penalize second incomes, discouraging households from augmenting their earnings.

Japan’s economy is a witch’s brew of advanced technology, special incentives, and declining demographics. Breaking out of a deflationary spiral is hard. We all hope Japan can do it.


Douglas R. Tengdin, CFA
Chief Investment Officer
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