Stuck in Japan: Crisis Sheds Light on Disappearing GDP Growth

Japan stands out as a country particularly hard hit by the recent economic crisis. As per recent Goldman Sachs estimates, Japan's real GDP is expected to fall as much as 5.8% in 2009, after already falling 0.7% in 2008. Coupled with tepid growth in previous years, what this means is that the recent crisis has shown that Japan is still stuck in the mud when it comes to GDP growth. If 2009 plays out as Goldman forecasts, then, coupled with 2008's performance, Japanese real GDP will be going back to pre-2004 levels. Years of GDP growth wiped away.

For the US and the EU, while substantial real GDP contractions are expected, -2.9% and -4.2% respectively as per the same Goldman econ data, in a sense it really isn't that bad since both regions are going back to about 2006 levels of real GDP.

If we then think in terms of cumulative growth since the end of 2002, even after the expected real GDP contractions for 2009, the US and EU will have grown their real GDPs 12.5% and 8.7% respectively. And this is using end-2009 (a nasty data point) as an end point. Japan, unfortunately, over the same span will have grown only 3.6%.

Which brings a thought to my mind. Why do some see the current crisis as a mark of failure for capitalism? Despite all the problems, US real GDP growth has had strong relative performance over the last few years as per the numbers above.

Nevertheless, Japan has a lot of unique strengths also. I believe the country has a bright future, as perhaps the crisis will bring some much needed flexibility to the economy. A higher degree of shareholder activism has been one clear benefit from the crisis already. Also, partly to balance my negative remarks vs. Japan in this post and partly to highlight some good news on the economic front, I note that the Japan's factory output has grown for the third month straight. Hopefully, the country's ex-post 2009 GDP contraction will be less than what some on the street expected.

Japan’s industrial output rose for a third month in May as companies rebuilt inventories and the economy started to climb out of its deepest postwar recession. Production increased 5.9 percent from a month earlier, the Trade Ministry said today in Tokyo, matching a gain in April that was the fastest since 1953.

Comments

[Mad Hedge F...:]

Good point. It’s sad to see a once great country fall on hard times. It’s like watching a formerly leading hedge fund manager apply for food stamps. I’m talking about Japan, which in 1989 boasted the world’s most valuable stocks, largest banks, and strongest currency. Oh, how the mighty have fallen. This week the Ministry of Finance published the trade figures for May showing a 42% YOY drop, and that the cataclysmic fall in exports continues unabated, as foreigners keep their money in their pockets instead of buying high quality cars and electronics. Even exports to China fell 29.7%. I’m sure the chart below will be found in business school textbooks for decades to come as proof of the risks of running an overly export dependent economy. Although a giant fiscal stimulus package will start to hit in the second half of this year, most economists have GDP forecasts for the year of minus 6.8% or worse. This would take GDP back to the 2004 level, and make our economy look positively bubbliscious by comparison. This is all happening when the numbers of those retiring is going through the roof, causing welfare payments to skyrocket. Taking a page out of Obama’s playbook, the government is borrowing to meet these costs, so the national debt is expected to reach the certifiable nosebleed territory of 197% by next year! Prime Minister Taro Aso has so far fought off increased consumption taxes, but it is just a matter of time before those efforts are tossed out the window. Continued deflation is a no brainer. Real estate prices are still stuck at 30% of their 1990 levels. This is what an “L” shaped recovery looks like up close and ugly. In the meantime, the yen strengthens, making exports ever more expensive and uncompetitive. Better to stand aside from the Land of the Rising Sun and watch with tears. Is the US next?

Jun 29 02:08 PM

[HaavBline:]

There is a pretty good chance that Japan nominal GDP will be surpassed by China's next year (2010) .

Perhaps this, combined with LDP's lost of power after 50 years, will finally jolt the Japanese into more reforms and taking bigger chances. The society has been just too static, inward-looking, 'homogeneous' (as the Japanese themselves like to say), and complacent.

Jun 30 12:31 AM

[Ivan Kitov:]

Real GDP in japan has one but crucial reason to fall - the decline in younger population, specifically 18-year-olds. We have explained the downturn in 1991 and also predicted the decaying growth rate in 2004.
ideas.repec.org/p/pra/...
There is no force to recover the growth rate any time soon. Unemployment rate will fluctuate near 5% and GDP deflator will be around -1% per year, i.e. almost permanent deflation ideas.repec.org/p/pra/...

Jun 30 05:50 AM