Back into Recession?

Japan's economy appears to be at turning point. Real gross domestic product for the April-June quarter grew an annualized 0.4 percent from the previous quarter — much lower than the 4.4 percent for January-March and the 4.1 percent for the October-December quarter. The value of the yen to the U.S. dollar remains near the high level that prevailed 15 years ago, hurting prospects for export-oriented firms.

"Eco-car" subsidies and "eco-point" incentives for purchase of energy-saving products, which helped underpin consumer spending, will end in September and December, respectively. The government and the Bank of Japan must take fiscal and monetary measures to prevent another dip in the Japanese economy.

A Kyodo News survey of 107 major firms — the results of which were released Aug. 16 — shows that 80 percent of them expect the economy
to deteriorate in the October-December quarter or in the first quarter of 2011.

Economic activities in the April-June quarter were supported by exports, which increased 5.9 percent from the previous quarter. But prospects for economic recovery in the U.S. and Europe are weak. Even the Chinese economy is slowing down. Exports to the U.S., Europe and emerging economies are likely to become weak.

Consumer spending, which accounts for some 60 percent of GDP, only grew 0.03 percent. The end of "eco-car" subsidies and "eco-point" incentives for other products will cause consumer spending to drop, thus making makers cut production. Although capital spending increased by 0.5 percent, the Kyodo News survey hints that enterprises may become reluctant to increase capital spending later on because of pessimistic prospects.

Nominal GDP fell an annualized 3.7 percent, the first drop in three quarters, and the GDP deflator dropped 1.0 percent, compared with a 0.3 percent rise in the previous quarter, indicating that Japan is in serious deflation. The unemployment rate was at 5.3 percent in June — worsening for four straight months. The problem is that the government is slow in response and the BOJ does not appear to have a sense of crisis. They must carry out timely measures that are effective.