Japan’s first quarter

Japan’s recession, now four quarters old, knocks the spots off those in other major developed economies. So Germany expects to shrink 6 per cent this year? Pshaw. Japan managed that in just five months. The world’s second biggest economy contracted 4 per cent quarter on quarter in the first three months of 2009, according to data released on Wednesday. That follows a 3.8 per cent decline in the previous quarter.

It is tempting to see this as the nadir. Japan’s worst slump since the war is accompanied by some chirpier signs. Forward leading indicators, including those measuring sentiment, are nudging upwards. Since Japan is, in effect, a leveraged play on the global economy, it seems reasonable that green shoots sighted elsewhere should sprout here too.

There are technical reasons to expect a better showing this quarter. Japanese inventories are being whittled back, shaving 0.3 percentage points off growth. Industrial production, back at 1983 levels, and exports, keeping pace with 2003, cannot fall at the same steep magnitudes forever – especially with governments everywhere in stimulus mode. Early indications suggest fiscal spending may be having an impact at home too. Japan’s three big carmakers are claiming year-on-year increases of 20-30 per cent in new orders this month, following the introduction of tax breaks on eco-friendly cars.

But none of this is necessarily sustainable. Household consumption, down 1.1 per cent quarter on quarter, remains worryingly weak. Unemployment continues to rise, summer bonuses will reportedly be crimped by more than 10 per cent and the savings rate has already dropped below that of the US. Ditto for private capital expenditure, down 10.4 per cent quarter on quarter, given the sea of red ink at manufacturers and depressed utilisation rates. When sales pick up, manufacturers need only reopen shuttered plants, not build new ones.

Japan may indeed have touched bottom; with nominal gross domestic profit now back at 1992 levels, it must be hoped that it has. But it will be a long haul back out again.

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