Japan's 'Unimaginable' Contraction

Well, it isn't only in Europe that we are having a hard time of things. Last week Kazuo Momma, head of the Bank of Japan’s research and statistics department, warned that Japan’s economy now faced an “unimaginable” contraction, and today we can begin to see just what the unimaginable might look like, since the preliminary data for fourth quarter GDP are now out. And what we find when we come to stare the unimaginable in the face is that Japan’s economy contracted by 3.3 per cent in the three months to December (compared with the previous quarter), effectively the country's worst economic performance in 35 years.

On an annualised basis, gross domestic product declined at a rate of 12.7 per cent, a number which perhaps better than any other highlights the depth and severity of a slump that has surely now dispelled all those early hopes that the global economy might be able to shrug off the effects of the financial crisis just like that. To put things in a comparative setting, the contraction was three times as bad as that of the US in the same quarter.

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This quarter's big slide in GDP was in fact the second-worst the country has experienced in modern times, lying just a thin hair's breadth away from the record 3.4 per cent quarterly contraction clocked up in 1974, in the wake of the first Middle East oil shock, and well beyond anything Japan's economy has experienced in what is now the "lost decade and a half".

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The slowdown was pretty generalised, but led most decisively by exports which plunged an unprecedented 13.9 percent from the third quarter (see chart below). In fact Japan has become systematically more dependent on sales abroad for growth over the past decade, and overseas shipments make up 16 percent of the economy today compared with about 10 percent in 1999.

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Domestic demand, which includes spending by households and companies, made up 0.3 of a percentage point of the contraction, while capital investment fell 5.3 percent. Manufacturers cut investment spending by a record 11.3 percent in the quarter, indicating they have little need to buy equipment as factories lie increasingly idle. Consumer spending, which accounts for more than half of the economy, dropped 0.4 percent on the quarter, as exporters began firing workers.

"There’s no doubt that the economy is in its worst state in the postwar period,” Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo. “The Japanese economy, which is heavily dependent on exports of autos, electronics and capital goods, has been severely hit by the global slowdown."

After ten years of sacrifice and reform, it must be pretty shocking for most Japanese to discover that their economy is still in "terrible shape".

And The Worst Is Still To Come

Evidence of Japan’s slowdown can now be found right across the economy. On Monday the country’s electric utilities industry association said that power generation had fallen 6.4 per cent in January as the industrial sector rapidly winds down. This was the sixth straight monthly decline and the steepest fall since a 6.9 per cent drop recorded in July 2005. Even Japan's services sector is suffering, and the new Japan Services PMI, compiled by Markit Economics on behalf of Nomura and published for the first time on the 4th February, showed the country’s downturn deepening in January.

In addition the Nomura/JMMA Manufacturing PMI survey indicated that the goods producing sector contracted at a series record rate in January, in excess of the 22.5% annual decline indicated by official Trade and Industry Ministry (METI) data for December, with plummeting export sales leading the sector’s decline. With both manufacturing and service sectors reducing employment at sharp rates in January, consumer confidence – and therefore household forthcoming spending on both goods and services – looks set to deteriorate further moving into Q1, dragging Japan’s economy deeper into recession.

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Japan’s consumers remained at their most pessimistic level in at least 26 years in January (see chart below), indicating households are likely to keep cutting back on spending as the recession deepens. The confidence index nudged up very slightly 26.4 from December's 26.2, according to the Cabinet Office last week. December's numbers had been the lowest since the government began compiling the figures in 1982.

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Export Dependency Is The Heart Of The Problem

But why is Japan so export dependent? Well here you will find explanations to suit every palate, but if I can just add my 5 cents worth, I would say that the fact that Japan's population currently has the highest median age on the planet is not simply an incidental correlate (nor is the fact that Germany has the second highest median age and is currently struggling with the same problem simply another incidental detail). Basically years of ultra low fertility coupled with relatively unfriendly immigration attitudes means that the median ages of the Japanese and German population (at 43) are now the highest on the planet. Previously it was assumed that we wouldn't see much in the way of economic consequences from all this till much later in the century, but now, to me at least, it is obvious those consequences are already here.

The consequences are, basically, to be seen in very weak domestic consumption growth, which means that economic growth (which is needed to pay all those pensions and health care costs) is totally dependent on exports, and hence the economic well-being of others. And this growth roller-coaster (which can only get worse as the median age rises further) cannot be that much fun for the population at large. One minute you have the best growth in a decade, and the next you go crashing through the floor. Ouch!

So - in addition to the bank regulations fix - something also needs to be done to slow down the rapid ageing of the Japanese and German populations, and as far as I know there are only two ways to do that, get fertility up, and open the doors to immigration.

In this context it is interesting to note that an 80-strong group of economically liberal politicians in the ruling Liberal Democratic Party (LDP), led by Hidenao Nakagawa, a former LDP secretary-general, are pushing for a change in immigration policy (full story in the Economist here). These venerable gentlemen are calling for the number of foreigners living and working in Japan to rise to 10m over the next half century, and for many of these immigrants to become naturalised Japanese. In addition the Keidanren, the association of large manufacturers, is also shifting position, and last autumn called for a more active immigration policy to bring in more highly skilled foreign workers. The Keidanren estimates the present number to be a mere 180,000. The Economist refers to these moves as bold, I would rather term them "baby steps" in the right direction, although we must wait and see what material outcome such pressures lead to, for good intentions have often been expressed in this regard in the past.

As for fertility, again there is a lot of debate about how to encourage people to have more children, and I am sure there is no easy answer here, but I can think of one thing which would help, and that is a change in the national mindset. You see, maybe it isn't true to say that countries like France, the United States and Sweden will have no problems with population ageing, but they will certainly have a lot less than many others, since their underlying pyramids are much more stable. And you know what? Few people in these three countries would question the fact that having enough children to maintain national economic stability is important, while in the worst affected countries - Japan, Germany, Italy, Russia, China etc - we find precisely the opposite situation, with few people thinking of the fertility topic as an important one. Indeed many people in very low fertility countries attempt - often vociferously - to deny that long term demography has any economic significance at all. No wonder then, that people in these countries have less children. So when you make your long list of all the lessons which need to be learnt from all the hurting we are just about to get, be sure to remember to add this one.

Comments

[Sentinel:]

Well "the ilster", it looks like the Cornucopians were all over you with negative comments like flies on a cow-pie sandwich.

Which is why I gave you your first positive.....because you are absolutely correct. Japan is entering back into another lost decade because most of the ground they gained over the last decade and in particular the last 6 was just like us here in the States.....Phoney Baloney Credit Wizardry.

It will be interesting to see going forward as the second largest holder of U.S. debt what Japan will do when it finally dawns on them that we are insolvent as a nation. By the time Medicaid goes broke in 2014 and The Messiah's 3rd Stimulus Plan is still winding its way through the economy even though he will no longer be in power, and our National Debt is approaching 100 trillion dollars (that's counting everything, unlike the way our Government fudges the numbers by playing "hide the soap"...Japan will still be in the doldrums and looking to sell off some of that debt for cash.

By then....who will by our worthless debt instruments and/or our hyper-inflated currency?

Domo arigato, Mr. Roboto?

Feb 16 07:54 PM

[Mafeking:]

Interesting article, however, on the population and export issue one should note that correlation is not necessarily causation.

Feb 16 08:27 PM

[the ilster:]

I am long SDS


On Feb 16 05:45 PM norkot2003 wrote:

> you want to be long sds , not short.........you need to be long
> a short

Feb 16 08:29 PM

[hdr:]

This severe recession is turning into a deep depression. I believe WWII got the US out of the depression, but how do we get out of this one?

Feb 16 09:39 PM

[Repsonsible...:]

WWII did indeed pull us out of the Great Depression , the Next World War III will most likely be fought with Nukes , Poision the LAND FOR 1000 YEARS and KILL 40%-50 of the people on earth. Most of our modern communiactions systems and conviences will be made useless. Life will go back to much like it was in the early 1900s Unfortunatly most people under 40 just won't be able to cope with the hard life that will be upon us. Most of them were raised with No discipline, No values either moral or financial . They'll simply crumble into a heap and die .
I was a child in the Great Depression one of 7 kids , many nights we went to bed hungry, we were lucky we had a old house to live in , no furntiure left exept a big table we ate at when there was food. we slept wrapped in blankets in winter . Things stayed pretty much like that through the 30s didnt get better till we got into the War in 41. In 1942 me and my 2 brothers enlisted they were both killed in 43 on the front, I was lucky and was staitoned in Califorina as a Morse Code instructor.
I was a Child in the First Depression and looks like I'll be a Oldman in the second one , I doubt Ill live long enough to see America get back on her feet, as for the last 30 years of living way over are means I doubt America will ever see those days agin .
God Forgive Us and Help Us through the Hell we are about to go through.

Feb 16 10:19 PM

[Aristophanes:]

Criticisms:

The fertility "problem" in Russia is huge and very much discussed, although with blustery frowns in the general direction. It is usually framed as "How are we going to maintain the size of our military in such a vast geography?"

Immigration is nt a long term solution because:

1) Most immigrants to a society quickly adopt the patterns of socio-economic behaviour of the host nation. They won't breed more after generation one. So the door not only has to stay open, it has to get bigger every year for the net economic benefit to continue.

2) Most immigrants now are older, and need to be in our information age society. The cost of integrating the illiterate is staggering (I know, I've practised it) and often not an investment with ROI, sadly.

3) Almost all nations are ageing on average as birth rates drop significantly around the world, meaning that there be fewer and fewer nations to import labour from, and everyone will be fighting over the same sources.

4) There is an increase in reverse repatriation as noted by the U.N. That is: More workers in generation one and two post-emigration are returning to their ancestral homeland rather than staying in their destination country. They are taking their wealth and skills to high growth economies away from slow growth ones. The exception are immigrants who are genuine (not economic) refugees. the latter have proven very hard to integrate except at very high cost often being the most traumatized and dislocated. the latter usually flourish only after generation two, so the payback is delayed while the social service costs are all up-front.

All in all, immigration is more difficult for cultural, language, education and retention reasons. In a 100 year scope, it is no substitute for increased fertility.

Good topic. This will be a very hot issue in the next few decades, underpinning a great many economic calculations.

Feb 16 10:27 PM

[Moon Kil Woong:]

A stagnant economy and dropping population still equals a rising standard of living. Something a rising population and marginal growth doesn't offer it's population. In the end, the last 10 years of the US has witnessed a reversal of the quality of life even though politicians like to boast about the marginal growth that now has been wiped out.

Saying a country can solve all its woes with more population really is a s simplistic a solution as saying solve an economic downturn simply by printing more money. In both cases, it doesn't improve the lot of the citizens. In fact, it can make their quality of life worse.

Feb 16 11:29 PM

[curious cat:]

it has been noted that we can still attract immigrants with citizenship, which we could make conditional on five or six years of continual home ownership, of homes over an x dollar value. this would ensure an educated, wealthy familial, increase in a young consumer age population that would not burden our social safety nets and would support our housing prices.

also, although i do not use recreational drugs, my tax dollars are spent trying to stem the inflows of illegal drugs, to no avail. by legalizing marijuana, we could reduce the number of people in prison, capture a huge windfall in taxes on this product, create more jobs, regulate and control this industry, the way we currently do pharmaceuticals, alcohol and tobacco, and stop wasting tax dollars. we might be able to get our politicians to stop lying about inhaling and decriminalize our greatest swimmer, while we're at it.

after all, drug cartels are not the problem, the problem is the demand for drugs coming from our citizens. demand creates a market for these goods and services. legalize marijuana and penalize people who operate vehicles under the influence. give them a ticket for driving too slow.

whenever alabama tries to legalize gambling, all the protestors are supported by neighboring states, where they stand to lose considerable revenue if we install our own lottery. the same thing is happening when anyone brings up the legalization of marijuana, those people who are currently raking in illegal profits support the politicians who are against the sanest move we can make as a nation. time to start voting for people who are not under the influence... of money.

Feb 16 11:32 PM

[Victor84:]

Yes let us talk about World War III and how it will kill 50% of the population and the survivors will live like it's the early 1900's. That's really helpful and cheery.

Remember that time heals almost all wounds and just like how everyone thought the world would end countless times over, the world will recover from this, hopefully a little wiser.

We might have learned a lesson from the Japanese lost decade: that a speedy stimulus response may get us through this quicker and with less pain. For everyone bashing the stimulus and the financial bailout plan, we can all agree that this response, to one of the worst recessions in memory, is historic and will be an invaluable lesson for future generations.

Feb 16 11:39 PM

[zalo:]

Idea:
Instead of increasing goverment spending, a law can be passed stating that any new personal/corporate savings will be taxed. So, instead of collecting taxes and spending the money inefficiently, don´t collect extra taxes but push the people to buy what they need and want.

Another idea:
Pass a law that makes companies to pay employees in consumption certificates (i.e. 50% of the salary) that has a certain expire date.

Feb 16 11:46 PM

[HaavBline:]

Japan has much deeper problems. Its political system is every bit as un-reformed and troubled as its economy. And the source of both problems come from the Japanese people themselves.

For more than sixty years, the Japanese voters failed to venture out from the ruling Liberal Democrat Party despite horrible performance and perpetual instability of this old and corrupt political entity in which factions fight for influence like feudalistic warlords.

A 'democratic' society that failed to enforce a regime change in 60 years should look into the mirror and figure out what's wrong with this society.

Feb 17 01:14 AM

[Moon Kil Woong:]

HaavBline: I agree with you there. It is shocking that the public hasn't developed a decent opposition after experiencing such disastrous financial times as it has and such a string of poor leadership.

However, others blaming it on a declining population is ignoring the root cause of their national problems: entrenched leadership supporting entrenched companies and industries (agriculture, construction, banking, and key conglomerates).

They have yet to ever escape from a planned economy which may work for developing nations but not for economically fully developed country. Especially within Japan which has such a high income bracket.

Feb 17 04:17 AM

[investor88:]

Japan is enduring tough times. No easy solution.

Feb 17 08:03 AM

[Jan Baker:]

Mafeking expressed a sentiment that will be echoed by many: just because their population has dropped, don't causally tie that to their dire economic situation.

Right. Keep saying that, because that way we can keep our own blinders on.

I have a little piece on the blog that examines the demographic situation in Europe and Asia, and gives a solution: It's called 'Catholics Save Wall Street."

But it's really simple. It's as simple as sunrise and sunset, and as rooted in the order of the universe. The reason why Thou Shalt Not Kill is inscribed in the rock, is economics. Don't kill the consumer.

Previously, population drops from disease, catastrophes, and war, were followed by population booms, and the booms, with the new demand they engendered, floated the economy to dry land. It has been invisible, because it was, prior to birth control, inevitable.

Japan has had a problem with population longer than ours, rooted in cultural practices that bear examing (a condom company discovered that its sales were ever sinking in Japan because masturbation and pornography had supplanted Japan's never very ardent heterosexual intercourse; who would have thunk it?).

But we have caught up. We have passively allowed Malthusian thought to continue to dominate public opinion, because it provides an intellectual platform for some comfortable cultural practices of our own--sexual "freedom," homosexuality, easy divorce, and most of all, abortion.

We have killed fifty million consumers in the last forty years. Think there won't be a consequence? We'll call it 'failure of internal demand,' and we will run around like chickens denying the sky is falling, until it's too late. What is too late? Demographers know; they say no society as ever recovered from a birth rate falling below 1.3. They also say that even at higher rates, all the way up to bare replacement rate, as the US just fell below, interestingly enough (no causal relationship, no sir!), recoveries take longer and longer until, though survival is effected, the term 'civilization' no longer applies, not having survived .

Yet there are still cheerleaders for a future minus humanity who are even today plumping for increased abortion and birthcontrol, even today. You read it, too: Pelosi's scary statement about funding those articular 'medical costs' via the stimulus plan more generously now, due to our financial situation. At least the Wall Street Journal raised a hoary head and blinked at that one.

You read it but you won't process it. You can't face it. It would mean a return to all those things we've been making fun of for forty years. That would take balls.

Feb 17 08:32 AM

[If U Say So:]

While the mindset of people in Japan and Germany may be to avoid having children, I know the Japanese government doesn't see it that way. They have encouraged people to go home and have children. Yet, they really need to provide more significant incentives $$$. Its an investment for the future.
The 3 most homogeneous populations in the world are 1. North Korea 2. South Korea 3. Japan.
This seems to be much more difficult to change. Many of these countries hold value in their heritage, and don't like to mix with other races.

Feb 17 10:10 AM

[svkoho:]

Edgar, I think it's time to examine your assumptions. We have an overpopulated world. WE have an economy dependent upon the idea of growth which implies more consumption by more people. Is it not obvious that this is an unsustainable model? Energy is the driver in this model. Is that also not obvious? Energy, chiefly petroleum is declining and will never come back to former levels. Connect the dots. We are entering a different paradym.

Feb 17 11:16 AM

[notsosmart:]

bring back the samurai.

Feb 17 12:55 PM

[searcher:]

Dyspepsia abounds here. The cures for the bane of middle age are already a glut on the market to remedy faltering libidos and obstructed bowels. You don't have to be a Pollyanna to resist the whining funk in evidence here. If no solutions are offered, then what accommodation to economic Armegeddon is proposed?

Feb 17 12:59 PM

[kcr357:]

On Feb 16 11:46 PM zalo wrote:

> Idea:
> Instead of increasing goverment spending, a law can be passed stating
> that any new personal/corporate savings will be taxed. So, instead
> of collecting taxes and spending the money inefficiently, don´t collect
> extra taxes but push the people to buy what they need and want.

>
>
> Another idea:
> Pass a law that makes companies to pay employees in consumption certificates
> (i.e. 50% of the salary) that has a certain expire date.
"Pass a law that makes companies to pay employees in consumption certificates (i.e. 50% of the salary) that has a certain expire date. "
You are joking, right?

Feb 17 05:32 PM

[Maxe Paul:]

The thing that realy concerns me is that Japan actually make very good cars, and they are having a terrible time. American cars on the other hand are complete rubbish!, so what export hope have they got to get themeselves out of this mess.

Feb 18 10:31 AM