Now this is what the G20 leaders and their grandiose plans for global growth didn’t count on when they issued their statement on Sunday afternoon – a surprise lurch into recession by the world’s third biggest economy after a shock downturn in the three months to September.
The shock news of the slump is expected to see Prime Minister Abe announce a snap election for December 14, with his announcement expected later today.
For Australia it’s not good news. Japan is our second biggest export market and its continuing to struggle.
The surprise slowdown makes the Bank of Japan’s decision to boost its quantitative easing at the end of October look very farsighted.
As well, and election will delay a decision on the future of a second increase in the controversial sales tax (the first instalment on April 1 flattened the economy).
But it should be pointed out that the yesterday’s figures were the first estimate and in Japan they can be rather airy fairy – there have been big revisions in the past years in second estimates). The second estimate is out on December 8 and could very well see a different reading, especially with business inventories which was the big surprise in yesterday’s release.
Regardless of that, it’s likely the second part of the increase (2%, to a total of 10%) will be delayed 18 months.
Mr Abe will postpone the announcement of the second tax rise to make sure he wins the snap poll.
News that Japan’s economy unexpectedly fell into a recession after GDP shrank an annualised 1.6% in the September quarter shocked markets yesterday.
The yen staggered around, Tokyo stocks dropped sharply, with the Nikkei off 3%, and economists were left dazed and confused after their forecasts for growth of around 2.1% (annual, in a Reuters poll) was exposed as being woefully wrong.
Markets in Europe opened in the red and drifted lower until Mario Draghi, head of the European Central Bank, made some positive comments about further spending on securities purchases which calmed nerves.
What made yesterday’s third quarter report so shocking was that economists (and the Japanese government) had been widely forecasting a rebound from the sharp contraction in the June quarter in the wake of the April 1 tax rise (or 3%, to 8%).
But that June quarter contraction was revised in yesterday’s report to a fall of an annual 7.3% (up from the first reported 7.1%).
With two successive quarters of negative growth, Japan is now in the 4th recession since late 2008 when Lehman Brothers collapsed.
On a quarter-on-quarter basis, the economy shrank 0.4% in the third quarter, instead of growing 0.5% as forecast by the market.
Private consumption, which accounts for about 60% of the economy, rose 0.4% from the previous quarter, a sign that an increase in Japan’s sales tax to 8% from 5% on April 1, continues to hurt. Economists had been looking for a 0.8% rise in private consumption.
Private consumption slumped 5% in the revised second quarter data yesterday, so the small rebound in the September quarter wasn’t enough to drag spending back to pre April 1 levels.
Everyone missed a big fall in business inventories in the quarter which cut growth by 0.6%. If that had been unchanged from the June quarter, growth would have been positive – just 0.2%, but that would have been a lot better than what was reported.
Business spending dropped 0.2%, after a 4.8% fall in the June quarter, which was another surprise.
