It’s official: Japan’s economic recovery is running out of steam. A spate of consumer and business surveys said as much; several private sector economists are flagging the possibility of recession. The government has slashed its estimates. It expects the economy to grow 1.3 per cent in the year to March, down from earlier forecasts of 2.1 per cent.

The numbers, which bring the government in line with consensus, highlight the extent of the gloom in the world’s second biggest economy. Even with a lower base, the next fiscal year’s economic growth is forecast to be 2 per cent compared with earlier expectations of 2.2 per cent. This year’s revision partly reflects clumsy regulation, the most glaring example of which is more stringent standards for housebuilders. New rules have extended the approval process, with insufficient staff adding to the bottlenecks. The government reckons the private housing element of gross domestic product will drop 12.7 per cent this year, but sees it bouncing back 9 per cent next year. That is ambitious on two scores. It assumes a rapid recovery to levels seen before the new rules and fails to take into account the possibility that, if land prices continue to rise, demand for homes will fall.

Domestic demand is in any case weak – a standing tribute to the blocked transmission mechanism in Japan. Several years after corporate Japan returned to profitability, having shed excess debt, labour and capacity, wage growth remains sluggish. Salarymen and companies alike are increasingly reluctant to spend. The new mood of caution is evident everywhere, from lacklustre bank lending to a renewed preference for deposits over equities. In September, according to Bank of Japan figures, deposits once again accounted for half of total Japanese financial assets while exposure to riskier assets fell. Japanese households appear to be hunkering down for bleaker times – a pretty fair assessment of the situation.

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