#dnaEdit: Setting sun

The world’s third largest economy, Japan’s relapse into recession is a bad augury for the global economy. With Europe showing signs of secular weakness and the Chinese economy stalling and moving towards a long term low growth scenario, this is proving to be too much of bad news for the financial markets. Asian equity markets tanked Monday in reaction to Japan’s economic tailspin. 
Japan’s Cabinet office released on Monday GDP figures which showed the Japanese economy contracting in the latest quarter by 1.6 per cent — till September. This was on top of 7.3 per cent shrinkage in the previous quarter.
This reversal follows the hike in consumption tax from six per cent to eight per cent introduced by the present government in April to shore up government finances and also to push up inflation. A similar tax was imposed in 1997 and it triggered a recession even then. Japan’s public debt constitutes 227 per cent of its GDP — which is the highest for the developed economies.
With the present fall in growth rate for the second quarter in a row, Japan enters another period of recession. Companies are refusing to build up inventories even after these have gone down because of the hike in consumption tax. They are also shying away from investing in Japan and capital spending has hit rock bottom. This is leading to the contraction of industrial production and GDP as a whole. Japan had been facing recession for almost two decades. 

One of the fundamental reasons for the Japanese economy’s slowdown is its rapidly ageing society. The size of the Japanese market is dwindling. The second reason is that prices are falling in Japan — a phenomenon which is described by economists as “deflation”. 

You might think that falling prices should be a good thing when with the same amount of money you can buy more. However, this is the worst economic ill, which all stakeholders from central bankers to policy-makers, dread most. As prices wind down, people stop buying in anticipation of future fall in prices, leading to reduced demand and investment. This drives the economy down and the vicious economic cycle keeps going.
Consider this fact: Japan’s corporates  — that is, small, medium and large companies — have cash and deposits on hand. They have free reserves running up to $1.98 trillion. The figure comes close to the entire annual GDP of India.

In the midst of this affluence, Japanese companies are refusing to spend money. Their investments in Japan are shrinking and even their production levels are falling. As a result, the Japanese economy is also shrinking.
The overall inflation rate in Japan is sub-one per cent and this is far lower than the inflation target of two per cent of Bank of Japan. To encourage spending and keep pump-priming the economy, the Bank of Japan had embarked on a similar course of action as the US Federal Reserve did in the wake of the global financial melt-down and financial crisis in 2008. 

The US Fed had been pumping in more money into the economy to encourage spending by individuals as well as companies. The Fed’s policy —known as quantitative easing — is now being replicated by Bank of Japan. The latter is buying government bonds to the tune of $1.2 trillion. It is hoped that the huge Japanese QE will push up demand and prices. However, so far there are no signs of prices picking up steam.

Prime Minister Shinzo Abe is hoping that his “Abenomics” policies of lax monetary policy, fiscal spending and structural economic reforms will revive and propel growth. Abe has also promised path-breaking reforms in labour regulations, the tax system and the health industry, to help improve Japan’s competitiveness. But these assurances are yet to be implemented on the ground.