Japans surprise recession: what it means for the global economy

Published:2014-11-18

Japan’s economy is now in a recession; the nation’s GDP fell 1.6% this past quarter, coming as a surprise to many economists who anticipated an expansion of 2% or more. Japan's economy is the world's third largest.

Yahoo Finance Editor-in-Chief Aaron Task discussed the significance of the economic conditions in Japan and the fallout this unexpected news is having on the global economy. After a seven-year high last week Japanese stocks sold off this morning. “That rolled over into European equities and hit U.S. futures this morning,” Task says.

“The Japanese Government and the Central Bank of Japan has thrown everything but the kitchen sink at the Japanese economy and it doesn’t seem to be working, and that’s got a lot of people kind of freaking out,” notes Task.

In April, the nationwide sales tax was raised to 8%, leading to an economic decline of 7.3% for the previous quarter. But Prime Minister Shinzo Abe’s government may balk at implementing another planned increase in a few weeks, bringing the consumer tax to 10%. An economy is technically in recession after two consecutive quarters of contraction.

 

Task notes the Japanese consumer is “incredibly sensitive.” After the initial tax jump, Japanese consumers altered spending habits, cutting back significantly in an economy where consumption makes up 60% of the economy.

“This has been the story in Japan for 20-plus years; every time they take a step forward they come up with some kind of policy: they raise taxes or they tighten monetary policy, and they go right back into the sink and that is a real concern because what’s happening in Japan… is starting to happen in Europe, and there’s that whiff of disinflation [in the U.S.] too, so that’s why everyone is so concerned about what’s going on in Japan,” says Task.

“Abe looked like maybe he was finally getting some traction, but every time they do anything that isn’t whole, full-throttle stimulus, the economy falls back.” Abe’s opponents have taken the opportunity to point out the lack of efficacy his policies have had in improving economic results.

Task calls the economic debate in Japan a mirror-image of the fiscal debate in the U.S. over the policies of the U.S. Federal Reserve and ways to stimulate economic growth.

The current question for Abe is whether he will opt for additional stimulus or call for a snap election, which will allow the government to postpone or cancel the proposed tax bump.

 

 

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