Japan sees another economic contraction in its Lost Decade

One of the main themes of my work has been the economic struggles of Japan which have had many facets. One feature is in line with the times because all the rhetoric of the COP26 meeting that has just ended ignores one way of reducing demand which is the population declines that Japan has been seeing for a while now. But today has brought something which is part of the Lost Decade(s) concept.

TOKYO — Japan’s economy shrank 0.8% in the July-September period from the previous quarter, equal to an annualized pace of 3.0%, the Cabinet Office announced on Monday.

The economy struggled as exports fell and consumer spending remained sluggish amid the COVID-19 pandemic. The result compares with an average forecast of an annualized 0.56% decline, in a survey of 37 economists by the Japan Center for Economic Research. ( Nikkei Asia )

It is hard not to have a wry smile at the spurious accuracy of the -0.56% estimate as contrary to the stereotype Japanese GDP numbers are often revised partly I think because of their use of the expenditure version. Here is some more detail on the breakdown,

Private consumption fell 1.1% from the previous quarter. Services such as dining dropped 0.1%, semi-durable goods like apparel fell 5.0%, and durables such as appliances declined 13.1%. Private investment excluding residential assets dropped 3.8%.

The promises of the Olympics in Tokyo providing a boost turned out to be a mirage at best.

The July-September quarter coincided with a state of emergency in Tokyo, Osaka and other areas. Although the Tokyo Olympics and Paralympics were held from July to early September, shorter restaurant hours, closures of large commercial facilities and other precautions put the brakes on travel and dining.

This begs a question of how you put big projects like an Olympics in the GDP numbers as there will have been a boost from building work but how do you allow for the fact that it was not fully used ( no spectators). This moves us onto another way where Japan surprises in that you would think with the fact that mask wearing was a common sight when I worked in Tokyo in the 1990s and with the Japanese obsession with hygiene that Covid-19 would be taken in its stride, relatively at least. Whereas reality was a dithering vaccine programme and then trouble.

Minds naturally turn towards comparisons with elsewhere.

Japan’s recovery lags behind other developed countries. The U.S. reported an annualized 2% growth in the July-September quarter, while Eurostat announced 9.1% in the eurozone. China’s economy also grew 0.8% on an annualized basis during the same period.

Bank of Japan

This is where we see another especially Japanese feature because whilst other central banks have become more like the Bank of Japan in the scale of their actions, no-one else buys domestic equities like it has done. Also the moves below will not be joined by it.

Recently, some central banks abroad have taken steps toward reducing monetary accommodation.

That was from Governor Kuroda earlier and he gave his thoughts.

Given this outlook, let me underscore that the Bank still needs to persistently continue with powerful monetary easing under the current Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control,
with a view to achieving the price stability target.

This “powerful monetary easing” is as we have already noted not going so well on the economic growth front. Well from Governor Kuroda’s point of view inflation is not going well either.

In this regard, as presented in the October Outlook Report, it is likely that the inflation rate in Japan will increase gradually toward fiscal 2023, by which time the pandemic is expected to have ended, but will not reach the price stability target of 2 percent by then.

Of course Japanese consumers and workers will be grateful for Japan’s resistance to inflation especially as a lack of wage growth has been a feature of the Lost Decade(s).

Switching to his view on the economy it was not the best of day’s to claim growth in the Japanese economy.

The economy has continued to pick up from the bottom hit in spring last year, but the recovery has been somewhat slower than initially expected.

In fact that pick-up rather rapidly morphs into a decline.

The outlook for Japan’s economy is that, for the
time being, downward pressure stemming from vigilance against COVID-19 is likely to remain on services consumption, and exports and production are expected to remain in a temporary deceleration phase due to supply-side constraints. The economic growth rate for
this fiscal year therefore has been revised slightly downward from the July forecast of 3.8 percent to 3.4 percent in the October forecast.

Perhaps one day I will find a dictionary that defines a pick-up as a temporary deceleration.

Supply Chain Problems

Such a thing was always going to be a particular constraint for Japan.

Due to supply-side constraints on parts, Japan’s production and exports have been under downward pressure, mainly for the automobile-related sector.

It has a couple of particular features.

When looking at supply-side constraints Japan’s economy face, it is necessary to divide them into two causes: (1) the
supply-chain disruptions due to the spread of COVID-19 in Southeast Asia and (2) the problem that supply has not been able to keep up with the surge in demand, mainly for
semiconductors.

Demographics

I pointed out earlier Japan’s issue with demographics and Covid-19 has had an impact via the ageing population Japan has. Here is Governor Kuroda again.

Attention is being paid in particular to consumption by senior households, which accounts for nearly 40 percent of overall private consumption. High-frequency data based
on credit card transactions suggest that seniors had been very cautious in terms of services consumption even though they were ahead of other age groups with respect to progress with vaccinations.

This is an interesting nuance and another problem for the “pick-up”. We know from the UK and European experience that another Covid-19 wave can be expected this winter. We also know that whilst the vaccines help they still leave the elderly at risk. This is on the fault line of another Lost Decade(s) issue which has been weak consumption growth in Japan.

Another Stimulus

These are a regular feature of Japanese economic life.

TOKYO, Nov 8 (Reuters) – Japan is considering an economic stimulus package worth more than 30 trillion yen ($265 billion) aimed at easing the pain from the COVID-19 pandemic, a plan that would require issuing new debt, Kyodo news reported.

That is part of the problem though because we have had so many and yet the Lost Decade(s) just carry on regardless.

From the news this morning it now looks to be more like 40 trillion Yen which means that yet more debt will be piled onto the 257% of GDP that the IMF calculates. In some ways Japan is like my subject of Friday Germany but not this one as Germany is at 73%.

Comment

The basic feature here is that in spite of the stimuli both fiscal and monetary growth disappoints and we find ourselves noting another decline. Covid has brought its own issues but the Japanese economy was shrinking before it hit. There is an irony because the decline at the end of 2019 was due to an attempt to halt the decline in the fiscal position via a higher Consumption Tax. Now we see that the debt to GDP ratio could push towards 300%. In isolation that is it the issue you might think because Japan is a big saver and owes the money to itself mostly especially if you factor in the 527.6 trillion Yen holdings of the Bank of Japan. But it does mean that interest-rates are capped as it would not take much to overturn the debt apple cart.

Let me present to you another feature of the Lost Decade(s).

“Most economists blame stagnant wages, which have been flat for nearly three decades; the OECD reports that annual real wages in Japan averaged about $39,000 in 2020, a mere 4% more than those of 1990.” ( The Japan Times )

They are falling again and we run a regular cycle where the media proclaims a triumph on any rise but then goes silent on declines. Talking Heads were right about real wages in Japan.

We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride

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