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On technical definitions at least, Japan is officially half way into a recession. Real GDP contracted by 0.6 per cent on a quarter-on-quarter basis in the April-June quarter. So what? Compared with a year ago, the world’s second biggest economy is still expanding. At first glance, Japan looks as well-equipped as any to withstand recession. Corporate balance sheets are robust and consumers, unlike their global peers, are not over-stretched. Japan Inc is certainly better placed than the past post-bubble era downturns, having shed much of its excess debt, labour and capacity.

The government’s position is less enviable, however. It is cash-strapped and unpopular with voters, who are being squeezed by rising prices. Any fiscal stimulus – with 0.5 per cent interest rates, monetary easing is hardly an option – would thus play better to voters than to the state’s balance sheet. Japan may have a fiscal deficit of 2 per cent of GDP, according to the Organisation for Economic Co-operation and Development figures, but it is the rich world’s most indebted nation and has already this year embarked on a $1,200bn bond issuance programme. Moreover, the shrinking economy will inevitably dent tax revenues by a few percentage points; perhaps by $14bn or so, Credit Suisse estimates. A stimulus package, say by extending financial aid to smaller businesses and consumers, could cost a similar amount.

Conversely, any positive impact is likely to be small. Japanese shoppers never took up the baton. That is partly why – now net export growth is dropping out of the picture – the economy is shrinking. With corporate profit growth reversing, tempering wage rises and perceptions of job security, consumers are gloomier still. A deteriorating fiscal picture would arguably even increase their caution, by adding to the case for higher taxes. Japan may lack a housing bubble of US or UK proportions, but condominium prices are tumbling and inventories rising – problematic when the construction and related sectors employ maybe a tenth of the workforce. Alas, Japan is no better insulated if recession hits than any of its G8 peers.

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