Japanese Fourth-Quarter Growth Devastatingly Poor

February 16, 2009

Japanese real GDP sank at a 12.7% annualized rate last quarter, slightly more than forecast and the greatest drop since the first OPEC shock in 1974.  Exports plunged 45% at a seasonally adjusted annual rate (saar), and net foreign demand accounted for 94% of the decline in GDP.  Residential investment and government spending advanced by 24.6% saar and 3.7% saar, respectively.  Nonresidential investment and personal consumption dropped by 19.5% saar and 1.6% saar.

The drop of Japanese GDP last quarter far surpassed GDP declines of 3.8% in the United States, 5.9% in Euroland and Great Britain, and even 8.2% saar in Germany.  inventories and net exports made a combined net contribution to U.S. growth of 1.4 percentage points and a combined negative contribution to Japanese growth of about 11 percentage points.  Among components of final domestic demand, Japan performed better than the United States last quarter  except in comparisons of business investment, which fell at similarly sharp rates in the two economies.

4Q vs 3Q saar, % Japan United States
Consumption -1.6% -3.5%
Housing +24.6% -23.6%
Non-Res Investment -19.5% -19.1%
Government +3.7% +1.9%


Real GDP in Japan plunged 4.6% between the fourth quarters of 2007 and 2008, much more sharply than drops of 1.8% in Britain, 1.2% in Euroland and 0.2% in the United States.  Japanese GDP had advanced 2.0% in both the year to 4Q07 and the year to 4Q06.  Japanese real GDP for 2008 as a whole fell by 0.7%.  Full-2008 growth had been positive in the United States (1.3%), and Euroland (0.7%).

Because of the plunge in import prices, which is subtracted from the GDP price deflator, such swung into the black with an on-year 0.9% gain in 4Q after a drop of 1.6% in the year to 3Q08.  However, the deflator fell by 0.9% in 2008 as a whole, the tenth calendar year decline in a row.  The deflator’s average annual drop over that decade was 1.2%.

The enormous drag of net exports will raise the anxiety of Japanese officials but is not a surprise.  The weekend G-7 statement’s failure to mention the yen points to a likely lack of currency intervention unless the yen appreciates considerably further toward 85/$ or beyond. Like the ECB, the Bank of Japan will come under mounting pressure to implement quantitative easing in the future.  Instead of softening the hit to net foreign demand, policy has to focus on stimulating domestic demand.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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