It is a mediocre kind of recession. Japan’s banks have not blown up, its housing sector has not collapsed, and the mood is one of glum resignation, but in its economic weakness Japan is paying the price for its reliance on growth overseas. There is now only one option left: Japan must boost consumption at home, or else mirror the suffering of its export markets.
Growth for the third quarter was revised down from an annualised minus 0.4 to minus 1.8 per cent. That is bad, even though Japan’s output data are notoriously volatile, and the main cause of the revision was deeper falls in business inventories. Inventory is not infinite.
The bigger picture, however, is still depressing. The Japanese economy may not be as far below trend as Europe or the US, but led by a slump in exports and business investment, output is sliding quite fast enough to bring rising unemployment.
The policy prescription differs little from that of other countries. Hard as it is to advocate fiscal stimulus in Japan– a country in which politicians spent decades using deficit spending to dam any river and build roads to anywhere that voted – now is the time. In the unlikely event that Japan’s government put money in the hands of low and middle income workers, it would do much to rebalance the economy towards consumption.
There is little the Bank of Japan can do now. It should not be shy about a return to unconventional monetary policy, but given the poor prospects the bank could force zero per cent money on corporate bankers and then threaten them with baseball bats, but they would still struggle to lend it out. That is despite the recent rise in borrowing from Japanese banks, which reflects the closure of commercial paper markets, rather than a sudden urge to invest on the part of Japan KK.
That leaves the yen, and the option of intervention to weaken it to try to boost exports. If the yen surges again it would be legitimate to intervene to slow the rise. Japan would also have a case if China took sustained action to weaken the renminbi. In and of itself, however, a weak yen would add nothing to global demand, and be simply a beggar-thy-neighbour attempt to corner such demand as there is.
The only option for Japan’s policymakers is to muddle through. There will be no growth from exports in 2009 and chasing them is the road to disaster. A boost to consumption, from fiscal stimulus and a strong yen, is not only the best hope of keeping the economy moving: it is essential to offset economic weakness in the rest of the world.
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