slowdown in Japan

People who like black and white answers and numerical precision–whether the situation calls for them or not–define a recession as being two consecutive quarters of decline in real GDP (“real” here meaning after factoring out the effects of price changes–in Japan’s case, deflation).

On this way of looking at things, Japan entered its fourth recession since the global financial crisis when the government announced early this week that the economy had shrunk by 1.3% on an annualized basis during the September quarter.  This comes after a fall of 7.3% during the June quarter, when Tokyo implemented the first of two planned increases in the national value added tax.

Today’s situation seems to me eerily similar to that in 1997, when Tokyo stopped a nascent recovery in its tracks with a similar value added tax rise.

Prime Minister Abe reacted to the new GDP data by postponing the second value added tax increase, which had been penciled in for 2015, and calling for a general election that he intends to serve as a referendum on his policies.

Almost two years in, the fundamental sticking point for Abenomics remains unaddressed.  The idea has been to induce a large depreciation of the currency–a loss of a third of its value, so far–to lower production costs for export-oriented industry.  This makes export goods more competitive in world markets and buys time for industry to streamline and expand.  Industrial renaissance gradually repairs the damage done to national wealth through the currency depreciation.  Prosperity also induces a gradual currency rebound, restoring at least some of the wealth lost through its decline.

In many ways, Abenomics is the successful template Japan used to recover after WWII.  This time, however, Japanese industry has shown no inclination to restructure itself that I can see.  And until now Tokyo has done virtually nothing to dismantle the barriers to change of corporate control which it put in place as its economic malaise began in the 1990s and that ensure ossified managements remain in place.

For the sake of Japan, one can only hope that the point of the upcoming election will be a mandate to force industrial reform.  Without this, Abenomics will wind up merely as creating a massive loss of national wealth and a similar drop in living standards.

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