Japan: Back into recession

Japan: Back into recession

Japan: Back into recession

Global Economic Outlook Q1 2013

Japanese exports have been hampered by a recession in Europe, declining automobile sales, waning government spending, an aggressive monetary policy, and a high-valued yen.

The year 2012 began with moderately positive prospects for Japan. While other large economies were expected to decelerate, Japan’s was expected to grow faster than in 2011 due to massive reconstruction spending. And indeed, growth was reasonably good in the first half of the year. Yet it now appears that Japan fell into yet another recession during the second half of the year.

The current recession has several culprits:

  • Japan’s exports have been hurt by the recession in Europe, weakness in the United States, and the slowdown in China. In the third quarter of 2012, real exports declined at an annualized rate of 22 percent. Moreover, the political dispute between Japan and China over a group of islands claimed by both has poisoned the economic relationship between the two countries. Sales of Japanese-branded products in China have plummeted. Japanese auto companies are now planning on a weak sales environment in a country that had been seen as an important growth market. Further, in Japan’s upcoming (December 2012) election, the opposition Liberal Democratic Party (LDP) is expected to win—and LDP leader Shinto Abe has taken a more nationalistic stance on foreign policy issues than the current Japanese leadership. This could have a further chilling effect on relations between Japan and China.
  • Some of the economic strength Japan displayed in the first half of the year was due to government incentives that support the sale of fuel-efficient automobiles. These incentives have now been eliminated, leading to a deceleration in car sales.
  • Government investment spending in Japan is weakening as the reconstruction budget runs out, and no other forms of fiscal economic stimulus are taking place. Thus, fiscal policy is not providing an impetus for growth.
  • Although Japan’s monetary policy has become more aggressive, it has not been successful in ending the country’s ruinous deflation. Declining prices mean that real interest rates are relatively high. Plus, the expectation that prices will decrease leads consumers to delay purchases. Indeed, consumer confidence remains low, and consumer spending is declining.
  • The value of the yen has remained relatively high, thus hurting the competitiveness of exports.

A debate is raging about the future direction of Japan’s monetary policy. The Bank of Japan (BoJ) has implemented a program of asset purchases, which was accelerated in October. The BoJ set an explicit target of 1.0 percent inflation. Yet deflation has continued, so the monetary policy has yet to produce the desired result. Political leaders are urging the BoJ to take a more aggressive stance and purchase assets until inflation returns. Abe, the leader of the LDP opposition party, is calling for a target of 2 percent inflation and wants to require the BoJ to finance government stimulus spending. In line with this view, Abe is calling for the government to limit the BoJ’s independence. While such a measure is unlikely to pass in Parliament, the fact that politicians are so angry at the central bank could have an impact on policy in the future.


The outlook for Japan is poor. Several factors are likely to inhibit a strong recovery. First, Europe is expected to remain in recession until at least the second half of 2013, which will have a negative impact on Japanese exports. Second, the situation with China is not likely to improve any time soon. Third, Japan’s current government policy is not supportive of growth. (That said, the LDP has indicated that it will support more fiscal stimulus spending if it wins the election. Hence, there is some uncertainty about the direction of policy.)

The weakness in exports has seriously damaged the economic health of Japan’s corporate sector, especially export-oriented electronics and automotive companies.

The weakness in exports has seriously damaged the economic health of Japan’s corporate sector, especially export-oriented electronics and automotive companies. For example, a large private-sector employer in Japan says it faces significant losses. The struggles of Japan’s electronics companies stem not only from economic weakness, but from competitive challenges as well. The rise of Korean and Chinese competitors has damaged the brand equity of Japanese electronics companies. On the other hand, Japanese companies play a significant role in their supply chains.

Another challenge for Japan is the continued strength of the yen. This strength puzzles many observers, given that Japan has a massive sovereign debt (in excess of 200 percent of GDP) and a weakening trade balance. Under such circumstances, a country would normally experience a weakening of its currency. Yet Japan’s debt is not seen as problematic, given the country’s high rate of saving and very low interest rates. Moreover, the country’s economic stability, affluence, and low level of inflation create the impression of safety. As such, investors in search of safe havens flock to Japan—even if the return on their investment is quite low. This, in turn, boosts the value of the yen. Although the loosening of monetary policy has helped to ease upward pressure on the yen, it has not been enough.


Dr. Ira Kalish

Ira Kalish is director of global economics, Deloitte Research, Deloitte Services LP.

Japan: Back into recession
Cover Image by Maria Corte Maidagan