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):

1. 5 percent slowdown in exports amid the global economic downturn
2. Personal spending, accounts for about 60 percent of GDP, also declined 0.5 percent
3. Automobile sales were slow as purchases of eco-friendly cars did not increase
4. 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.

http://professional.wsj.com/article/SB10001424127887323894704578114732775620520.html?mg=reno64-wsj

http://www.yomiuri.co.jp/dy/business/T121112004305.htm?from=rss&ref=dyolwsj

http://www.yomiuri.co.jp/dy/business/T120920004155.htm

Japan posted another trade deficit with China and Europe due to the continued strength of the yen and the economic problems the countries face. Japan’s recovery may be delayed due to the fact China growth has slowed and they are Japan’s major exporter. The increase in exports, for the 7th straight time, by 10.9% to the U.S. helped lessen the trade deficit, but only so much can be done with exports to one country. China’s imports from Japan were down 9.9% which fell for a fourth straight time and Europe was down 22.9% also falling from previous declines. It is to early to make a ruling on the Senkaku islands, but it will be very interesting to see what effect the islands will play in the international trade between China and Japan.

The graph to the right shows the trade deficit that Japan has run in comparison to other countries.