Japan has problems of its own

With Lehman and AIG on everyone’s mind the entire spotlight is on the US Financial market right now. In all of this gloom and doom stories surrounding US, the second largest economy in the world Japan has been completely forgotten by market pundits.

But the truth is that Japan’s economic situation is getting worse by the day and there is more bad news coming out from Japan this quarter.

The recent GDP numbers for the second quarter of 2008 suggest that the economy has contracted by 0.7% compared with last quarter and the other numbers do not look any good either.

  • Private non-residential investment has contracted by 0.5% compared with the previous quarter
  • Exports of goods and services are down 2.5% compared with previous quarter
  • Private consumption has contracted by 0.5% compared with previous quarter

Exports and Private consumption have been two lynchpins of the Japanese economy and both are pushing each other in a downwards spiral right now.

The weak global markets have meant that the exports are weakening which is impacting sentiment of consumers at home and resulting in lesser private consumption. Those factors are impacting Japan in a very big manner right now. Coupled with its ageing population these systemic factors are plaguing its economy and it will take long term systemic reforms to get out of such a situation.

Short term measures are just not doing the trick, as evidenced by the failure of the recent stimulus package to perk up the economy.
There was a $110 bn stimulus package which failed to do much to boost the market sentiment (much like US?) and then there have been rate cuts that have failed to stimulate the economy either. These rates are very low right now and there is not much scope to reduce them any longer.

As long as there are no major negatives coming out of Japan (think Lehman) the world economy should be able to come out of this shock by early next year. However if things start going worse there as well, then we could be looking at a definite global recession.

Manshu Verma

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