Japan, world’s third largest economy has started showing signs of recession delivering a blow to the hopes of a global economic recovery. The land of the rising sun suffered 3.5% economic decline as its GDP shrank 0.9% between July and September 2012. This is the worst drop in growth Japan has witnessed since the devastating earthquake and tsunami shook the country and its economy.
A row with China over the sovereignty of islands in the East China Sea did not help either. It resulted in violent protests in China and wholesale boycott of Japanese goods. This meant a massive slide in exports, particular for automobile giants like Toyota and Nissan.
Ironically, a strong yen has accelerated the decline in growth. How? A steady rise in yen makes exports from Japan more expensive.
Companies like Sony and Panasonic have slashed spending in reaction to huge losses they have faced recently. This translated into a slide in capital expenditure by 3.2%. Also, consumer spending, which plays a substantial role in Japanese economy, has dropped by .5%.
Is Japan officially into a recession? Not really. The term recession is usually applied when an economy shrinks for two consecutive quarters. But the practical situation is indicative of the fact that Japan is indeed experiencing recession.
Japan had a modest growth rate in the first half of the year due to substantial private consumption and government reconstruction spending. But when these factors faded, and exports declined, the growth suffered. A source from a large multinational bank said that decline in GDP is expected in the last quarter of 2012 as well. Things might start getting better from early next year, provided the health of the global economy and the eurozone does not deteriorate further.
Debasubhra Banerjee is an Associate with a Big Four professional services firm.