Japan's Recession Worst in G-7 So Far

December 9, 2008

Japanese real GDP growth in the third quarter was revised downward more sharply than expected to -1.8% saar from -3.7% saar in the second quarter, yielding a 2.8% annualized rate of decline during the middle two quarters of this year. That negative pace was significantly lower than Euroland’s -0.8% or Britain’s -1.0%.  U.S. growth over the same period was positive at +1.1% annualized.

Japanese real GDP fell 0.5% in the year to 3Q08, a 2.4 percentage point adverse swing from +1.9% in the year to 3Q07. The GDP deflator dropped 1.6% over the latest statement year, three times more steeply than the decline in the price index in the year to 3Q07. Nominal GDP fell by a distinctly deflationary 2.1% in the year to 3Q08 compared to a rise of 1.4% in the previous statement year.

Among key demand components, business investment fell by 7.8% saar in 3Q, government consumption slid 1.3% saar, and imports expanded 9.6%, about three times faster than the 3.4% increase of exports. Personal consumption (1.2% saar) and residential investment (16.5%) made positive contributions to GDP growth, but that boost was neutralized by the drag from declining business investment. Inventories accounted for about 40% of the decline in GDP. Net exports made a similar-sized negative contribution, and public-sector demand explained the rest of the drop. Between 3Q07 and 3Q08, personal consumption rose 0.5%, and current government spending firmed 0.4%. Exports (4.3% y/y) outpaced imports (1.1%), but public investment (-5.9%), private investment (-3.9%), and residential investment (-4.7%) each declined.

Japan’s recession has not gotten the same attention as Europe’s or America’s, partly because the Bank of Japan has cut interest rates by only 20 basis points so far. But real GDP had dropped most rapidly in Japan through last summer. Japan, like the other region’s, took a major economic turn for the worse this autumn. Corporate surveys by the government point to a likely annualized 31% plunge of industrial production in the current quarter. Usually, these forecasts are lower in amplitude than what actually transpires.



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