Libertad y Desarrollo Report: Japan and economic recession

A recently-published report entitled Japan: recession and high inflation cloud economic outlook cites the slowdown in growth, rising prices (and concomitant drop in consumption), a sharp fall in external demand, and rising inflation as the main factors producing the current recession in Japan. Santiago’s Libertad y Desarrollo (Freedom and Development) Center for International Economics published the report, which notes that the Japanese GDP “shrank by 0.6% during the first and second quarter of 2008, producing a negative an annual growth of -2.4 % for the second quarter.”

First among the reasons for the slowdown was deteriorating trade terms. The report states this is because “Japan imports fuel and its by-products, which makes (the nation) highly vulnerable to fluctuations in the international prices of these goods.”

A second major factor is the immense reduction in external demand, a phenomenon that affects Japan strongly due to its dependence on manufacturing. The report also states that “annual exports fell by 1.7% in June”, causing net exports to contribute “absolutely nothing” to Japanese GDP growth during the second quarter.

But Japan’s problems are not limited to external demand. Domestic demand fell 0.6% between the first and second quarter, mainly due to the weakened labor market, where unemployment reached 4.1% in June. This represents “a 0.5% hike vis-à-vis the same month last year,” states the report.

“Additionally, domestic consumption has been affected by the growth in inflation, which during June increased by 0.4% over the previous month, (resulting in) the highest monthly increase in the past ten years.” This price increase is the result of high fuel costs. Gasoline has risen 24.2%, in fact.

Japanese companies have also been affected, so much so that investment capital registered “its second consecutive negative quarter, with a contraction of 0.2% compared to first quarter growth. The first quarter also experienced negative growth of 0.1%.”

Lastly, the report concludes that slower growth and high levels of public debt, which according to the International Monetary Fund (IMF) during 2007 was equivalent to 93.7% of GDP, “may have adverse effects on the already weak Japanese economy, further hindering future recovery.”