Japan Brief/FPCJ, No. 0927
May 22, 2009


Japanese Economy Records Worst Postwar Contraction in First Quarter

The Japanese economy suffered its worst quarterly drop in the post-World War II period (actually since 1955 when statistics started) during the first three months of this year. The government on May 20 announced that the nation’s gross domestic product during the period fell by an annualized 15.2% after adjustment to price changes. The contraction was 4.0% on a quarter-to-quarter basis. This followed an equally steep decline of a revised 14.4% in the preceding quarter, which already surpassed the worst record of 13.1% set in the first quarter of 1974 in the midst of the first oil crisis.

However, as represented by Finance and Economy Minister Kaoru Yosano’s remark to the effect that “the worst is over for the Japanese economy,” a looming view holds that indicators will turn upward in the current quarter and afterward, and that GDP growth will return to a positive range in the second quarter, according to this view. One such indicator is industrial output. The mining and manufacturing production index for March went up 1.6% from the preceding month, for the first time in six months. A rise in production, apparently following the completion of inventory adjustment, is noticeable in such sectors as flat- panel TV sets and steel sheets for automobiles and construction, due to reviving demand in China.

While Yosano presumably had in mind the effects of a massive, record-breaking stimulus package on the order of 14 trillion yen to be implemented following the passage of a supplementary budget bill, the question of how the US economy, and Europe as well, will fare is still considered to be a crucial factor for the restoration of Japan’s economic health, and most economists warn against taking an optimistic view in this respect.

Given the consequences of shattering financial results at major corporations for the year ended March, especially in the auto and electric appliance industries, which have a broad impact on the rest of the economy, the outlook for employment and wages is all but bleak. This means a continuous weakness of consumer spending and hence domestic demand as a whole. The unemployment rate worsened by 0.7 points during two months through March to 4.8%, leading one economist to comment that employment adjustment looked likely to continue for another year, as quoted by The Nikkei.

Measures Urged to Prevent Further Downturn

Consequently, should there be a turnaround of the economy, it is expected to be a very weak one and even carry a risk of another downturn down the road. This makes it all the more important, the media say, for the government to take whatever appropriate measures it can to keep the economy from sliding further.

The key points of editorials in the five national dailies on May 21 were as follows:

Asahi Shimbun
“For the time being, policymakers should keep vigilant attention on a possible return of deflation and a further deterioration of the labor situation.” “A vicious circle could happen: rising unemployment rate cools consumption, which results in deflation. There are similar risks in the United States.”

Mainichi Shimbun
“What must be done is clear. That is restoration of a system in which the household sector supports the economy. In years until 2007, household consumption served to prop up the economy, but that was wiped away because of diminished incomes and rising unemployment. Under the circumstances, the conclusion to be reached is that policies centering on dealing with unemployment, assistance for re-employment and job creation are preferable to assistance to businesses.” “We have no essential measures to restore economic health other than to beef up the household sector, which constitutes a pillar of domestic demand.”

The Nikkei
“The government and the Bank of Japan have implemented their doses of fiscal and monetary easing to prop up the economy and they should continue to take effective measures as needed depending on the course of the economy. At the same time, structural reform that will lead to a strengthening of growth power, such as deregulation to prompt transformation of the industrial structure, is indispensable to put the Japanese economy on the track of continuous growth.”

Sankei Shimbun
“The government’s fiscal operation so far has been largely focused on short-term effects, but fiscal measures must include those with a mid- and long term vision linked to an autonomous recovery of the economy. To that end, deregulation will be indispensable in such areas as medical services, education, energy and environment, and agriculture, which will lead to expanded domestic demand. Economic growth can hardly be expected if people are flinching and live in uncertainty. We hope a reform strategy that will lead to a full-fledged recovery will be laid out by the government.”

Yomiuri Shimbun
“While excessive pessimism can drag the economy down, over-optimism is also risky. In the mid-1990s, the nation invited severe financial depression by adopting a belt-tightening fiscal policy after experiencing the relief of a temporary economic recovery. In a speech made in April, Bank of Japan Gov. Masaaki Shirakawa described the situation at that time as a ‘false dawn”. The government must now guard against a further deterioration of the economy by ensuring it is not cajoled into losing focus by a temporary bright outlook.”

(Copyright 2009 Foreign Press Center, Japan)

*Japan Brief is an original production of the Foreign Press Center, Japan, and does not represent the views of the Government of Japan or of any other body.


<Related Articles>
-Japan Decides on Another Stimulus Package of Unparalleled Scale(2009-04-13)
-At G-20 Meeting Japan Sides with the U.S. and China in Advocating Stimulus(2009-04-06)
-【Press Briefing Report】Prof. Hiroshi Yoshikawa, Univ. of Tokyo: Outlook for the Japanese Economy in 2009(2009-03-10)
-Steepest Shrinking of GDP in 35 Years in Last Quarter of 2008(2009-02-24)
-New Additional Bailout Measures(2009-02-10)