Why Japan Keeps Falling Into Recession
Japan’s weak potential growth points to the country’s continued vulnerability to downturns
By Aaron Back
The Tokyo Tower notwithstanding, it’s hard to find a bright spot in Japan’s recent economic numbers. Photo: Bloomberg News
Japan is once again in recession. The situation isn’t dire, but weak corporate investment is an important warning sign that investors should heed.
Japanese gross domestic product fell by an annualized 0.8% from a year earlier in the September quarter, the second straight decline. This may overstate the extent of weakness, as it was dragged down by a big drawdown in inventories. Japanese companies may soon have to step up production to rebuild those stocks, setting the stage for a rebound.
However, the data highlight how vulnerable Japan remains to downturns. Its long-term potential growth rate, which economists estimate is only around 0.5%, means that the economy is basically always on the verge of a recession. That Japan’s working-age population is shrinking by around 1% a year is a powerful drag.
Weak potential growth explains why corporations are hesitant to invest in the future. One of the weakest readings in the third quarter data was private, nonresidential investment, which mainly reflects capex spending by businesses. This fell 1.3% from the previous quarter, or an annualized 5.0%.
Unless companies believe that the long-term outlook is getting better, they will continue to hoard cash rather than spend on new factories and the like.
Raising the potential growth rate is therefore the most crucial task for Prime Minister Shinzo Abe. There are really only two ways to do this: increase the size of the workforce or raise the average productivity per worker.
Japan shows little sign of allowing more immigration, the easiest way to grow the workforce. Mr. Abe does deserve credit for pushing hard to get more women working. Japan now has a higher percentage of working-age women employed than the U.S. or Europe. But many of these women are in part-time jobs with less potential for advancement.
Boosting productivity is even harder. Again, Mr. Abe gets credit for pushing the Trans-Pacific Partnership free trade pact, which will aid productivity by opening up sclerotic domestic sectors to new competition. Also needed are reforms to make the labor market more flexible so workers can shift to industries or jobs in which their skills are most needed.
If growth keeps disappointing, the Bank of Japan will continue to feel pressure to ease policy further. The BOJ’s official forecast, that GDP will rise by 1.2% in the fiscal year to March, already looks unobtainable.
But the BOJ has also long argued that it can’t do the job itself, and it needs the government’s help with structural reforms. With Japan in its second recession in two years, investors should hope that Mr. Abe gets the message.
Japanese gross domestic product fell by an annualized 0.8% from a year earlier in the September quarter, the second straight decline. This may overstate the extent of weakness, as it was dragged down by a big drawdown in inventories. Japanese companies may soon have to step up production to rebuild those stocks, setting the stage for a rebound.
However, the data highlight how vulnerable Japan remains to downturns. Its long-term potential growth rate, which economists estimate is only around 0.5%, means that the economy is basically always on the verge of a recession. That Japan’s working-age population is shrinking by around 1% a year is a powerful drag.
Weak potential growth explains why corporations are hesitant to invest in the future. One of the weakest readings in the third quarter data was private, nonresidential investment, which mainly reflects capex spending by businesses. This fell 1.3% from the previous quarter, or an annualized 5.0%.
Unless companies believe that the long-term outlook is getting better, they will continue to hoard cash rather than spend on new factories and the like.
Raising the potential growth rate is therefore the most crucial task for Prime Minister Shinzo Abe. There are really only two ways to do this: increase the size of the workforce or raise the average productivity per worker.
Japan shows little sign of allowing more immigration, the easiest way to grow the workforce. Mr. Abe does deserve credit for pushing hard to get more women working. Japan now has a higher percentage of working-age women employed than the U.S. or Europe. But many of these women are in part-time jobs with less potential for advancement.
Boosting productivity is even harder. Again, Mr. Abe gets credit for pushing the Trans-Pacific Partnership free trade pact, which will aid productivity by opening up sclerotic domestic sectors to new competition. Also needed are reforms to make the labor market more flexible so workers can shift to industries or jobs in which their skills are most needed.
If growth keeps disappointing, the Bank of Japan will continue to feel pressure to ease policy further. The BOJ’s official forecast, that GDP will rise by 1.2% in the fiscal year to March, already looks unobtainable.
But the BOJ has also long argued that it can’t do the job itself, and it needs the government’s help with structural reforms. With Japan in its second recession in two years, investors should hope that Mr. Abe gets the message.
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