What is Japanese for double-dip recession?

That’s a question being raised after the shock downgrade in third quarter economic growth; a move that revealed the Japanese government and its number crunchers seem to have lost touch with the reality of its still troubled economy.

Figures showing a sharp slowing in the reported rate of growth were released by the government yesterday and while the market had been expecting a cut, no one had even contemplated the extent of the downward revision; “Japan’s growth slashed” was the headline.

As a result there is a very real chance the Japanese economy could return to the red this quarter or in early 2010, hence the question about double-dip recession.

Japan’s cabinet office said real gross domestic product grew just 0.3% during the July-September quarter, instead of the 1.2% reported in the preliminary reading last month. On an annual basis, the world’s second-largest economy grew by a revised 1.3%, down from an initial reading of 4.8%, and half the pessimistic market forecast of a 2.7% rise.

The news added to the growing unease in markets about sovereign debt. Greece was warned by a senior member of the European central bank to make sure it cut spending, Dubai’s markets again fell (down 12% in three days) after Moody’s cut the ratings of other government groups to junk) And Standard & Poor’s put Spain on credit watch negative saying its prospects had worsened this year. In Dublin, the Irish government delivered a harsh budget that has to cut deep to keep its credit rating from joining Greece under the A level.

But the situation in Japan is fraught. After the relief of escaping the worst recession for generations earlier this year, it is shocking this huge economy seems to be losing its way again.

Compounding the problem is the return of deflation, ignored by the previous government for most of the year until its election defeat, it has bitten hard into third-quarter growth estimates.

In nominal terms the economy shrank 0.9%, instead of the price adjusted rise. That compares with the government’s initial prediction for a 0.1% rise, another example of where the number crunchers were wide of the mark.

That put’s nominal GDP under where it was back in 1992; so much for economic growth in Japan.

The GDP deflator, the broadest indicator of price falls, slid 0.5% in the quarter: it has only risen twice in the past decade.

But it was falling business investment (not rising as predicted in the first estimate) by the corporate sector drove the downward revision in last quarter’s growth.

Capital spending fell 2.8% in the three months to September from the previous quarter. That compares with the 1.6% increase estimate in the first GDP report.

That’s a huge error and a puzzling one at that. This revision accounted for two third of the cut in growth. Japan depends on business investment, production (weakening) and exports (rising, but still well short of last year’s levels, to drive its economy.

At first glance it was encouraging that consumption rose, up 0.9% from the first estimate of 0.7%. But all that spending was driven by government stimulus, especially the car scrappage scheme. That’s due to end next March, so it is no wonder the government wants to more than double the size of its latest stimulus package to $US81 billion.

So far, Japan’s exports have led the recovery, dragging industrial production and some other parts of the economy higher. Exports had their best performance in a year in October, down only 20% on last year, thanks to the strong spending and rebound in China and the impact of car scrapping plans around the world, which has helped the country’s important car sector recover (and boosted steel output as well).

But despite the export performance, industrial production slowed to its lowest rate of growth in eight months in October (and is more than 15% down on a year ago), inflation remains negative, job losses have stopped for the time being, but wages continue to fall and retail sales remain weak.

Peter Fray

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