Japan’s economy heads for depression

The latest GDP release for Japan, covering the period from January to March, revealed its economy was in its worst state since the Second World War. Growth slid four per cent in the quarter from the previous three-months, a 9.7 per cent drop from the year before. A 10 per cent fall is usually seen as representative of a depression.

The country has been hit by the rest of the world's problems, with exports collapsing, exacerbated by the strong yen. It is reliant on selling products to the US and Europe and has been slow to take advantage of the export opportunities to China and other fast-growth economies. Its currency woes have also contributed to the move towards deflation, the phemonenon it suffered in the 1990s, even as the rest of the planet enjoyed a global boom.

Like Western countries Japan's government is attempting to reflate its economy using stimulus packages and there is hope that corporates like Sony and Panasonic have learnt from past experience how to cope with severe conditions. Announcements so far have shown that they are cutting staff and mothballing production sites at an unprecedented rate. Japanese Prime Minister, Taro Aso, confirmed that: "Weakness in the corporate sector is gradually spreading to households... This is a very serious situation, so we need to respond appropriately."

Asian markets slid this morning in the wake of the release, with Tokyo and Hong Kong lower by about one per cent. Oil prices fell as investors questioned the likelihood of a recovery and Japan's problems worsened as the yen strengthened yet further against the dollar.

WHAT THEY SAID:

James Saft in Forbes: "There is no way to sugar coat the first quarter Japanese gross domestic product figures released on Wednesday: they were breathtakingly bad viewed from virtually any angle...It won't be glamorous, in part because the engine of growth will be elsewhere, but between now and the end of the year a rebound could be surprising and, depression-era style economic statistics notwithstanding, surprisingly profitable."

Lex in the FT: "It is tempting to see this as the nadir. Japan's worst slump since the war is accompanied by some chirpier signs. Forward leading indicators, including those measuring sentiment, are nudging upwards. Since Japan is, in effect, a leveraged play on the global economy, it seems reasonable that green shoots sighted elsewhere should sprout here too... Japan may indeed have touched bottom; with nominal gross domestic profit now back at 1992 levels, it must be hoped that it has. But it will be a long haul back out again."