Japan Isn't Headed for Recession, It's In Recession

Mish

The Japanese economy shrank at 6.3% annualized in the fourth quarter. Forget talk of recession, it's already underway.

A Japanese recession has started but you might not understand that if you read some reports.

The lead image is from Coronavirus Threatens Japan Rebound as GDP Falls Most in 5 Years.

Blue text and square anecdotes are mine.

The BBC reports Japan's Economy Shrinks at Fastest Rate Since 2014

Annualised gross domestic product (GDP) fell by a much steeper than expected 6.3% in October-December. There are also concerns the coronavirus outbreak will mean the slump continues this quarter. That has raised fears that the world's third-biggest economy may fall into recession.

During the period Japanese consumer spending fell 2.9% after the country's sales tax was raised in October to 10% from 8%. In the same month Typhoon Hagibis hit large parts of the country. Last quarter, capital spending dropped by 3.7% and exports slipped 0.1% amid the ongoing US-China trade war.

Investors are now watching to see whether the economy will rebound after the coronavirus forced China to shut down factories and led to a big drop in Chinese tourists visiting Japan.

How about a little realism here?

The Japanese economy shrank 6.3% annualized even before the coronavirus impact.

Reuters reports Coronavirus cases rise again in China as recession looms for Japan, Singapore.

The number of reported new cases of coronavirus in China’s Hubei province rose on Monday after two days of falls, as authorities imposed tough new restrictions on movement to prevent the spread of the disease which has now killed more than 1,700 people.

With no end in sight for the outbreak, Japan and Singapore appeared to be on the brink of recession with data on Monday pointing to possible contractions in the current quarter.

Across China many factories remain closed following the extended Lunar New Year holiday, disrupting supply chains around the world. Virus-related damage to Japan’s economy is expected to show up in the current quarter, stoking fears of recession in the world’s third-largest economy.

Fears of recession, or already in recession?

The New York Times reports Japan’s Economy Shrank Sharply. Now Comes the Coronavirus.

After hits from storms and a tax increase, the world’s No. 3 economy could face recession as the outbreak takes a toll on tourism.

Japan’s economy has already been staggered by a devastating typhoon and a wallet-shutting tax increase. Now, the coronavirus that has brought business in neighboring China to a virtual standstill threatens to knock Japan into a full-blown recession.

If Japan’s economy — the world’s third largest after the United States and China — shrinks again in the first quarter of 2020, the country will officially fall into recession for the first time since a brief dip in 2015. A recession is generally defined as two straight quarterly contractions.

I will come back to that definition in just a bit but it is not a good definition nor is it accurate.

Third Fatal Mistake

The Wall Street Journal reports Japan’s Third Sales-Tax Blunder Must Be Its Final Mistake.

Japan’s economy shrank sharply in the final three months of 2019, logging its second-worst quarter in the past decade. That would be easier to stomach if it weren’t because of a mistake policy makers have now made three times.

In October, Japan raised its sales tax to 10% from 8%—and spending tanked. Household consumption fell 11.5% on an annualized basis in the October-December quarter, fueling a 6.3% fall in annualized gross domestic product.

Sales-tax increases in 1997 and 2014 likewise knocked the economy off course. The three worst quarters for household consumption in the past quarter-century were those in which sales tax was raised.

Brad Setser on Japan's Mistake

Michael Pettis On Japan's Mistake

Work at Home

Great Recession Flashback

In the early months of 2008, many observers believed that a U.S. recession had begun. The collapse of Bear Stearns and the resulting financial market turbulence signaled that the crisis would not be mild and brief.

The former head of the National Bureau of Economic Research [NBER] said in March 2008 that he believed the country was then in a recession, and it could be a severe one.

According to numbers published by the Bureau of Economic Analysis in May 2008, the GDP growth of the previous two quarters was positive. As one common definition of a recession is negative economic growth for at least two consecutive fiscal quarters, some analysts suggested this indicates that the U.S. economy was not in a recession at the time. However, this estimate has been disputed by analysts who argue that if inflation is taken into account, the GDP growth was negative for those two quarters, making it a technical recession. In a May 9, 2008 report, the chief North American economist for investment bank Merrill Lynch wrote that despite the GDP growth reported for the first quarter of 2008, "it is still reasonable to believe that the recession started some time between September and January", on the grounds that the National Bureau of Economic Research's four recession indicators all peaked during that period.

In March 2008, financier Warren Buffett stated in a CNBC interview that by a "common sense definition", the U.S. economy was already in a recession.

The above from Wikipedia Great Recession in the United States.

Real Gross Domestic Product

The NBER is the official arbiter of US recessions. The NBER pegged the Great Recession start as December of 2007.

However, the above chart shows that US economy grew in the fourth quarter of 2007 and second quarter of 2008.

There were not two consecutive quarters of negative GDP. There was not even one!

Two consecutive quarters of negative GDP is a sufficient condition but not a necessary condition of a recession.

Economic writers constantly struggle with this construct.

Common Sense

Note to economic writers: Please refresh yourself on the difference between necessary and sufficient.

With the Japanese economy collapsing at at a 6.3% annualized rate in October-December and with a coronavirus tourist collapse in the first quarter, by any common sense measure Japan is already in the midst of a severe recession.

And forget any talk of "technical" recession, this one rates to be severe. The coronavirus is certain to amplify a very poor sales tax hike policy decision.

Mike "Mish" Shedlock

Comments (22)
Sechel
Sechel

Guess who is the #1 nation Japan exports to, it's not the U.S. but China.

No. 1-13
Tengen
Tengen

Writers can deny recessions because we're printing/injecting liquidity fast enough that "markets" can laugh off just about anything. It's been a crazy ride but we may finally be nearing the endgame we've been waiting for since 2008.

Back in the days of TARP, I didn't think the central bankers could inflate their way out for long. They were able to defy gravity longer than I imagined, but the coronavirus and many forms of civil revolt are making the system look increasingly wobbly. It needs to be flushed, no matter how much pain it causes, since it's the only way humanity can move forward again. Waiting around for the inevitable Ponzi failure has gotten very old.

KidHorn
KidHorn

IMO, we've been in a recession ever since the Lehman collapse.

Realist
Realist

Japan is the example that no-one is learning from. For 3+ decades they have been doing ”whatever it takes” to keep their economy moving. This is the reality of politics today. No-one wants to be responsible for a recession or depression. So they keep trying to ”stimulate” economic growth with tax cuts, spending programs, low interest rates, then negative interest rates, etc

Soon they will bring in negative tax rates.

Most other developed economies are following Japan down this rabbit hole, including the US. Before he was elected, Trump railed against these stimulus policies, as he felt they were supporting a corrupt government. He was right. But now, he advocates for these same stimulus policies in order to support his corrupt government.

”Give me some of those negative interest rates. I want them over here.”

Plus he is enacting more tax cuts, more deficit spending more subsidies, more stimulus. Heck, he is running trillion dollar deficits after 10 years of economic growth.

Sadly, this is all predictable.

It’s why I keep saying that slow growth is all we are going to get. In the US I called for 2% average growth for the previous decade, and 1% average growth for this decade. And no growth after that. Governments everywhere are continuously borrowing growth from the future in order to keep things moving today.

I have also recognized that a black swan event could bring about a recession at any time. Though I still expect governments to continue to attempt to do ”whatever it takes” to keep stimulating. So a recession is likely to be brief. In fact, you may not get one at all in the US.

2 Replies

Tony Bennett
Tony Bennett

"Japan is the example that no-one is learning from"

...

So true. I just chuckle when people paint them in a positive light with their never ending cutting edge craziness. Uhh, never mind Japan has suffered not 1, not 3, not 5, but EIGHT recessions since 1990. Looks like number 9 at the plate.

Just lipstick until, and only until, the massive debt overhang dealt with via write down / write off / pay down.

hmk
hmk

It really needs more cowbell.

Sechel
Sechel

China's largest export market is China and China is dealing with Corona and just had a trade war with the U.S. Feels like the former weigh more heavily on the economy than a 2% rise in the consumption tax. Japan's savings rate is close to 12% so I doubt the tax hit personal spending that hard. Now I get that Japan run huge gov't deficits but since Japan runs such a large trade surplus couldn't Japan simply fund it by selling bonds to its citizens even. Lot to unpack there. Maybe I got a few things wrong so interested in what you think Mish

jivefive99
jivefive99

Why do I feel way more confident about numbers Japan reports versus (any) numbers the US reports? How our numbers always feel unrealistic or massaged up and other countries dont feel so threatened by reporting a bad number or two now and then ...

bradw2k
bradw2k

Mish: think you meant 2007 and 2008 here "However, the above chart shows that US economy grew in the fourth quarter of 2017 and second quarter of 2018."

stillCJ
stillCJ

Editor

"Taxes will increase until the economy improves" reminds me of "The beatings will continue until attitude improves".

Bam_Man
Bam_Man

"He's dead, Jim."

abend237-04
abend237-04

The economic march of folly continues with poor Japan in the vanguard. I wish Barbara Tuchman were alive to take her history hatchet to fiat currency.

Nixon unleashed the beast in 1971 with his "temporary" closing of the gold window. Politicians are grifters by nature; We demand it as voters. Fiat currency enables them and a generation of central bankers has now become adept at selling fiscal prolificacy.

Anyone still remember Paul Krugman going to Japan to sell them on faster printing and lower rates?

Maximus_Minimus
Maximus_Minimus

Net interest spending is low because 10-year JGB bond yield is zero, so new debt is free. The central bank is the sole buyer, since with ZIRP there is hardly any upside to buying bonds. Everybody is waiting for a giant earthquake or a corona virus...

Maximus_Minimus
Maximus_Minimus

Also to be mentioned that the highest profile legal racket, a.k.a the Olympic games flying circus is at risk in Tokyo. The income might not materialize, but the shovel ready jobs have already been created. The planet can breathe a bit more easily.

bradw2k
bradw2k

If China, Japan, and Germany are looking recessionary, that's the 2nd 3rd and 4th largest economies in the world sputtering. How will the US escape the tide?

Somewhere in the BEA: "Yes sir! <hangs up phone> Alright listen up dickheads, GDP WILL NOT go negative this year, or you'll find yourselves rotting on minimum wage in the private sector like the incompetent cows that you are. Now find me some goddam numbers I can work with!"


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