By: Dr. Mike Campbell
A recession is defined as two consecutive quarters of economic contraction. Japan posted a contraction of 0.3% in Q4 2010, but managed to post growth of almost 4% for the full year – this was the fastest rate of growth seen in twenty years, but of course was measured against the backdrop of the worst global economic downturn since the Great Recession.
Data just released for the first quarter of 2011 shows that the economy contracted by a further 0.9% on the Q4 figure. This figure gives an annualised contraction of 3.7% which is almost twice the level that most analysts were anticipating. Declining domestic demand accounted for almost 0.8% of the contraction whereas exports dropped by nearly 0.2%. Since domestic demand accounts for some 60% of the Japanese economic activity, the fall off of domestic demand is very worrying. The initial readings of Q1 economic activity will be subject to revision as more data becomes available, of course.
Of course, the Q1 figures were perturbed by the earthquake and tsunami that struck on March 11th, but the full impact of disaster will not emerge until Q2 figures are released. Of course, economic activity will pick up as the nation begins reconstruction efforts and repairs the shattered regional infrastructure. Power supply issues continue to be problematic and will continue to hamper manufacturing output until normal supply levels can be restored. A further problem for the economy is the hike in the price of crude oil. Japan is completely dependent on external supplies for its petrochemical needs.
Japan’s trade surplus fell by 34.3 % in March compared to where it stood twelve months earlier. The Yen continues to be close to record levels against the US Dollar, making exports to a major trading partner more expensive and so less competitive, compounding Japan’s woes.