Japan's real GDP declines 2.4% -- Watch for recession

August 25, 2008

Real GDP in Japan fell 2.4% in the second quarter this year, after rising 3.2% in the first quarter. Japan's Cabinet Office revised real GDP for 2008 down to 1%, after growing at a healthy 2.1% in 2007. Business confidence is at its worst level since 2003.  (Source: Marketwatch, Japan's second-quarter GDP contracts 2.4% on year, August 13, 2008; Economist, A slowing economy in Japan, August 14, 2008)

Japan is the world's fourth largest economy (after the EU, U.S. and China), so its decline would drag down the global economy, as well. This is worrisome when combined with the decline of the U.S. economy and the EU area.

Japan's Q2 GDP was hard hit by reduced exports, which fell by 1.7% in June, the first decline in five years and a result of the U.S. economy's decline. However, in July exports rebounded 8.1%, driven by a 16.8% increase in exports to China, which replaced the U.S. as Japan's #1 customer. Since Japan's economy is very dependent on exports, it must continue its shift to serving emerging markets. (Source: Bloomberg, Japan's Exports Rebound, China Becomes No. 1 Customer, August 21, 2008)

What Japan's real GDP decline means:

Japan's economy has only recently recovered from the deflation that hobbled it in the 1990's. To combat the deflation and recession, the Bank of Japan lowered interest rates to 0%, which caused investors to borrow money in yen at a low interest rate and invest it in higher-paying currencies, such as the dollar. This created liquidity in the global marketplace.

The Bank of Japan is also the largest holder of U.S. Treasuries. It does this to keep the yen low relative to the dollar, which keeps Japan's exports competitive.This strategy has caused Japan's debt to be 182% of total GDP output. (Source: CIA World Factbook)

Japan's economy has only recently allowed the BOJ to raise interest rates, to .5%. However, they are still low enough to keep Japan out of recession, according to BOJ governor Masaaki Shirakawa. (Source: AFP, Japan to avoid deep economic slump, August 25, 2008)

Action steps:
Watch for news about Japan's exports and economy over the next several months. If it falls into recession, this could further tip the scale towards a larger global economic downturn.

However, even if it avoids recession, its economy is not likely to rebound to growth rates seen in the 80's and 90's. For more on this topic, read the WorldMoneyWatch Global Economic Trend,  Japan Economy Stagnating.

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