Japan Slips Back Into Recession

The Japanese economy contracted by 0.9% in the third quarter of the year and most analysts expected that the performance in the fourth quarter would return the world’s third largest economy to recession to start the New Year. In the event, a revision of the figures for Q2 2012 has already put the nation in recession. The Q2 figures have been adjusted downwards and the quarterly GDP figure has been revised from 0.1% growth to a contraction of 0.03% (on a quarterly basis). If we are feeling charitable, we could consider that the economy stagnated in Q2, but it does look like the gloom will deepen when the final figures for Q4 are revealed early next year.

Japan faces a general election in five days and polls are suggesting that the Liberal Democratic Party (LDP) are likely to be returned to power – a position they have held for most of Japan’s post world War II history. The LDP is advocating that the Bank of Japan should return to being under political control and that it should embark on substantial monetary easing in a bid to kick-start the economy and reverse the price deflation that has dogged the country for more than 20 years. Such a move could “junk” the Yen, seeing it substantially discounted against other major trading currencies. This would help Japan’s exports to become more competitive in importing markets, but unless the revaluation was carefully handled, it could lead to questions being asked about Japan’s sovereign debt mountain. Potentially, this could force up the cost of government borrowing and plunge Japan into its own sovereign debt crisis. Given the geopolitical tensions with China and the fact that natural allies such as the EU and USA are deeply mired in their own problems, it is not clear who would come to put the fires out if Japan was caught up in a sovereign debt conflagration.