If the past 18 years were like a bad dream for Japan’s economy, the past 15 months have been a nightmare. But second-quarter stats show that the Japanese economy jumped by 2.3%, outshining the rest of the G-7 economies by a wide margin. Is the world’s number two economy on the mend?
Japan’s post-1990 economic woes are legendary. In the preceding decade, real growth averaged 4.7% annually. That sunk to average yearly performance of just 1.1% in the 1991-2003 period. A significant recession, failure to deal quickly with a massive banking crisis, a business model that began to crack and a rapidly ageing population each contributed to the economy’s sudden about-face. Sustained radical fiscal and monetary policy measures failed to jump-start the behemoth. The only obvious legacy is a national debt load large enough to make Italy blush.
One might think that with sluggish growth like that, there wouldn’t be much room for a recession. Guess again. Japan’s recession was spectacularly bad. In the fourth quarter of 2008, the economy was broadsided by a 12.8% annualized plunge in GDP, twice the decline of the other large world economies. If that wasn’t bad enough, the first quarter of this year saw a successive 12.4% plunge, an unthinkable collapse of activity. Moreover, the carnage was preceded by decreases of 2.8% and 5.1% in the second and third quarters of 2008. To put this in perspective, the Japanese economy grew by 21% in 16 years, only to lose 8.4% of its total output in four short quarters. Hard to believe.
It goes without saying that Japan has a lot of ground to make up. Is second-quarter growth a good start? Consumer spending added to the bottom line, but on balance growth was comparatively mild. Both business and residential investment plummeted, causing overall domestic demand to shrink 1% during the quarter. Imports followed this trend, off 5.1% from the first-quarter level. What saved the day? A 7.5% jump in public investment (read stimulus), and a surprise 6.4% gain in exports.
The growth sources look like the right mix. After all, exports were the engine of the economy in the 2003-07 period, and it seems right that the recovery should be export-led. But the general prognosis for Japan in the near term doesn’t support this. The consensus forecast implies a slightly up-tilted L-shaped recovery. On balance, Japan’s GDP is still expected to be 5%-6% below the early-2008 peak at the end of 2010, well behind the other top economies. Why is the outlook so gloomy?
An irrepressible currency is at least part of the answer. In the last four months, the yen has risen 7.3% against the US dollar. Most currencies rose against the greenback at this point, but by an average of just 4%; the yen is actually appreciating at almost the same pace as the commodity currencies. The appeal of the yen is a mystery, given the economy’s fundamentals, and Japan’s multinationals know it. Toyota, Honda and other large multinationals are experiencing severe bottom-line impacts, and are blaming it on the yen. The appreciation is enough, along with poor demographics, to keep Japan from participating in the world economy’s eventual recovery.
The bottom line? Japan’s second-quarter growth spurt looks like an anomaly. Stimulus will have a limited impact on the outlook, and exports will remain challenged as long as the yen continues to surge. For the moment, it seems unlikely that Japan will emerge from its 18-year funk.