Japan Brief / FPCJ, No. 0910
February 24, 2009


Steepest Shrinking of GDP in 35 Years in Last Quarter of 2008

To the consternation of the government and general public, Japan’s gross domestic product (GDP) shrank at an annual rate of 12.7% during the October-December period of 2008, the worst record in 35 years, causing economics minister Kaoru Yosano to call it “the largest and gravest economic crisis in the postwar period” on February 16, when the statistics were released. This underlined Japan’s distinctive fragility in the midst of the deepening global economic downturn. The GDP growth for entire 2008 was down 0.7% (1.6% in nominal terms).

It was the steepest drop since the 13.1% fall in the January-March period of 1974, when the nation was reeling from the effect of the first oil crisis. On a quarter-to-quarter basis, the fall was 3.3% for the third consecutive quarter of shrinking GDP. Many economists predict that the economy will shrink by double digits in the first quarter of 2009, too, resulting in an unprecedented four consecutive quarters of negative growth.

The overriding factor that explained the GDP decline was plunging exports, down 13.9% from the preceding quarter, the worst on record. Japan’s leading export products, represented by automobiles and electronic components, were hit hard as demand for them disappeared around the world. An additional blow came from spikes in the yen’s value. Decline in external demand accounted for 3.0 of the 3.3% drop in the quarterly GDP statistics.

The collapse of exports quickly affected domestic demand, corporate capital spending in particular, which fell 5.3%. Many manufacturing firms either put on hold or postponed investment programs because of falling profits or looming uncertainties over the future. Consumer spending, which had been stagnant for long, weakened further, down 0.5%, as concern about job security heightened, with a large number of temporary workers being laid off.

As most countries of the world, especially developed ones, are plunging into a recession, Japan stood out in the steepness of its downturn. In the last quarter of 2008, the GDP decline at an annual rate was 3.8% in the United States and about 6% in the Euro zone. Japan’s economic structure, heavily dependent on overseas demand, was to blame for this. Businesses’ aggressive capital investment programs had also presupposed robust exports.

The shattering fourth- quarter performance, and the prospects of deepening recession, are prompting the government and ruling parties to consider another round of stimulus measures, on a scale of 20-25 trillion yen, in addition to some 75 trillion yen in measures already decided. It has become all the more evident that Japan cannot simply wait for export markets to recover as major countries are emulating each other in taking heavy doses of fiscal stimulus to revive their flagging economies.

The forthcoming stimulus package will likely focus on investment to reinforce antiquated infrastructure facilities, quake-proofing of school buildings and hospitals, construction of optical fiber networks in sparsely populated areas, and facilitation of the use of renewable energies such as solar power generation. Multi-year projects will be frontloaded in the stimulus package, which will be part of a supplementary budget for fiscal 2009.

In the meantime the Bank of Japan decided on February 19 to extend the deadline for its commercial paper buying until September 30 from the current date of the end of March in view of the continuing severity of the financial environment. It also will start buying up to 1 trillion yen corporate bonds from March. The central bank also decided to keep the benchmark interest rate at 0.1%, which was cut from 0.3% in December.

As it fought the deepening recession and low-flying approval ratings, the government of Prime Minister Taro Aso suffered another major blow with the February 16 resignation of its finance minister, Shoichi Nakagawa, taking responsibility for his improper behavior at a news conference after the G-7 meeting of finance ministers and central bank governors in Rome on February 15. Minister for Economic and Fiscal Policy Kaoru Yosano succeeded Nakagawa, who was doubling as minister for financial services. Yosano thus serves in the three key economic portfolios, raising the concern about possible overwork and questionable concentration of power.

Longer-term Growth Strategy Demanded

In their editorial comments on February 17, major newspapers were unanimous in calling for a fresh round of strong measures to cope with the alarming deterioration of the domestic economy, especially in employment. But they also emphasized the need for longer-term policies to turn Japan’s economic structure into one less dependent on exports and more on domestic demand and to ensure sustainable growth in that direction.

The Asahi Shimbun: “The largest cause for such a rapid deterioration (of the economy) was the fragility of the economic structure overly dependent on exports, centering on the United States.” “Now that it has become clear that the industrial structure has deepened the crisis, a vision geared to an overhaul of the Japanese economy, not just measures seeking larger amounts of spending, is needed.”

The Mainichi Shimbun: “The consumer outlook index which had been on a decline since spring of 2007 turned upward in January thanks to declines in crude oil prices and other factors. Policies that shore up such a trend are needed. The yen’s rise is a favorable thing, too. It is important to make good use of it.”

The Nikkei (February 17): “What is important is how to spend money, rather than how to secure fiscal resources. Measures to counter global warming; health care, nursing and pension; education; agriculture; and transportation are sectors where policies need to be reviewed. If that’s done, international competitiveness of corporations will be enhanced and new sources of growth will be created in these areas.” “Is it not a line to follow to ask the voice of the electorate on these issues by dissolving the Diet once the fiscal 2009 budget is passed?”

The Sankei Shimbun: “Despite the long-standing effort to convert the economy into a domestic demand-led one, Japan still depends much on exports. A conversion of its industrial structure is needed. That requires a bold review of budget allocation and deregulation. Policies should be focused on potential growth industries, such as health care, agriculture, education and energy, which could lead to the next economic recovery.”

The Yomiuri Shimbun: “The Japanese economy is deteriorating at a significant and accelerating rate. The government and ruling parties must quickly present a prescription for getting the country out of this recession.”

(Copyright 2009 Foreign Press Center / Japan)


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