Japan: Economic Recovery Not Possible Without Improving Global Conditions

The Japanese government released new data on Monday showing the country’s economy entering yet another recession – the third since 2008 for the world’s third largest economy. This unattractive pattern is being driven by multiple factors, some internal and others external. Some of these factors include persistently tight consumer spending, weak demand for Japanese products in Europe, and reduced exports to China due to a diplomatic spat. Consequently, corporations such as Panasonic, Sharp, and Sony are cutting thousands of jobs; indeed, there seems to be no foreseeable end here as domestic consumption is not likely to rise in the face of continuing, and perhaps growing, job losses.

Japan’s internal problem includes an aging and shrinking workforce. As a result, even if Tokyo is able to somehow get out of this recession, the dwindling workforce does not bode well for Japan’s long-term growth. In order to solve this problem, Japan will have to liberalize its immigration policies, increase its birthrate, implement some combination of the two, or risk becoming increasingly irrelevant in the global economy. I realize, by the way, that neither solution is particularly attractive – especially to the Japanese who remain a closed and protective nation – but the alternative seems to be even worse.

In the meantime, Tokyo keeps searching for a solution to these repeated recessions and is running out of options as the government has already implemented multiple fiscal stimulus measures and they have not worked. Japan’s debt-to-GDP ratio is the highest amongst industrialized nations and, despite this fact, on October 26, Tokyo announced a $9 billion stimulus package in yet another effort to minimize the impacts of this recession. Incidentally, this is on top of another $125 billion spending package implemented following the March 2011 tsunami. The parliament, however, is stuck in a political standoff over debt-covering legislation and their actions are not increasing market confidence which already, as shown by data from the Bank of Japan, currently holds the lowest amount of stocks, bonds and investment trusts as a proportion of their assets since 2005.

I’d argue that given Japan’s dependence on export revenues, these stimulus measures won’t make a difference unless there is a corresponding improvement in China, Europe, and the United States. Unfortunately, this is something that Tokyo cannot control and that may be the toughest lesson of all for the Japanese government.