Data on Monday suggests that japan might already be in the early phases of a recession. Japan’s GDP shrank 3.5% from July-September, marking the biggest drop since the Tohoku earthquake. This also poses a risk to government plans to raise the sales tax to help offset the large debt Japan has incurred. Main reasons stated in a WSJ article for the steep drop in GDP include (see second article):
- 5 percent slowdown in exports amid the global economic downturn
- Personal spending, accounts for about 60 percent of GDP, also declined 0.5 percent
- Automobile sales were slow as purchases of eco-friendly cars did not increase
- Corporate capital spending also declined 3.2 percent
The slowdown in exports can be attributed the high appreciation of the Yen causing exports to look less favorable. As for personal spending, this is the second consecutive quarter it has posted a loss. Automobile sales were expected to increase before the end of the government subsidy program, but with personal spending down it was not the case. The fall in corporate capital spending can be attributed to the households spending less along with the fall in exports making companies feel that holding their assets is a better use of funds.
It will be interesting to see how Japan handles this situation moving forward, seeing as they did not fair well after the asset bubble burst in the late 80’s and early 90’s.