Gross domestic product, the widest measure of economic activity, fell 0.6% from the previous quarter on a seasonally-adjusted basis, the government said early Wednesday. That translates to an annualized rate of decline of 2.4%, and it represents the first quarterly contraction in a year.
The decline was the largest in nearly seven years, coming as rising prices of energy, food and raw materials hit consumers and corporations. Many Japanese companies are suffering from higher costs of materials at the same time as their sales decline around the world, and they are responding by cutting production. Japan is particularly vulnerable to higher energy prices, as it relies nearly entirely on imported oil.
They're being hit hard by the shrinking American trade deficit, among other things. And unlike American consumers, Japanese people respond to rising prices by buying less stuff, instead of borrowing the money to keep their consumption level.
Though some hysterical commentator will undoubtedly say it, this isn't a harbinger of another decade-long decline; it's the natural result of a bad patch in the global economy. The problems that sapped Japan's economic strength in the late nineties and the early half of this decade have been at least partially dealt with: its banking system is no longer so prone to keep underperforming loans on their books, throwing good capital after bad, and its corporations have become more flexible.
What this does indicate is how dependent the global economy remains on the American consumer. Most of the other large industrialized nations have so far failed to generate robust growth in domestic demand, which means that every time we cut down on imports, their economies swoon. That has to change, because American consumers can't keep borrowing and spending forever.
"...American consumers can't keep borrowing and spending forever."
True, but try telling that to the credit card and advertising companies, which keep urging American consumers to spend, spend, spend. Did you see that recent Citibank ad tauting a new service that allows people to check their credit limits on their Blackberries while in the store? It featured a guy deciding whether or not to buy a huge LCD television. The music? Queen's "I Want It All, And I Want It Now!"
"...American consumers can't keep borrowing and spending forever."
True, but try telling that to the credit card and advertising companies, which keep urging American consumers to spend, spend, spend. Did you see that recent Citibank ad tauting a new service that allows people to check their credit limits on their Blackberries while in the store? It featured a guy deciding whether or not to buy a huge LCD television. The music? Queen's "I Want It All, And I Want It Now!"
Ah, don't be such a pessimist, Megan. All we Americans have to do is convince the rest of world to pay us to borrow their money, instead of us paying them for that purpose!
"...American consumers can't keep borrowing and spending forever."
They can if people the world's well being is dependent on us doing so. What is that old saying about if you a $1000 the bank owns you but if you owe enough you own the bank?
As far as Japan goes, its aging population and huge public debt have a lot to do with its lousy economic performance.
Is Japan in a recession? Isn't two consecutive quarters of negative growth?
No. The harbinger of doom for Japan will happen in 30-40 years as it's worker:retiree ratio approaches 1:1. How will the workers pay for the social programs of the retirees?
I second Klug's confusion. My (admittedly imperfect) understanding was that "recession" was a term of art, defined as two consecutive quarters of negative growth.
So when the article says "it represents the first quarterly contraction in a year", doesn't that mean "it's not a recession yet?" This goes double for all the stories wondering if we're in the middle of a recession in the US, right after hearing that the past quarter had small but positive growth.
Is there another secret definition, used by econ journalists?
Demonspawn,
How will Japan support its retirees when they only have 1 worker for every retiree? Through more efficient workers and through automation. But I agree that it does look grim and they will be a case study for other aging (and developing) societies to examine.
The American consumer's ability to borrow has been driven by vendor financing from China and the GCC.
So the world is not reliant on the American consumer, but on China and oil rich companies demand of US debt.
-winterspeak
The American consumer's ability to borrow has been driven by vendor financing from China and the GCC.
So the world is not reliant on the American consumer, but on China and oil rich countries demand for US debt.
-winterspeak
And that will generate more income for the government programs supporting the elderly without a prohibitively high tax rate how? I have just enough econ background to know it's a nightmare scenario. The compounding "inflation" (likely not the right term) caused by the higher tax rates required to fund programs will make the cost of living prohibitively expensive. As younger workers flee the cost of living (and said cost of living disincentives immigrants) the problem compounds exponentially until implosion or massive cuts in socialistic programs.... angering the older class who "paid for it already" during their working years.
And considering that Japan has national health care, and older people require more and more expensive care.....
It's certainly not a difficult technical problem...
1. Figure out how many workers ('w') are ideally needed to pay for one retiree.
2. Line everybody up in order of age, and divide into w + 1 groups.
3. The oldest group gets paid by the other w groups.
Problem solved.
Now, how do you convince people to agree to a massive increase in the retirement age? No frickin' idea, but at least we've identified the real issue.
Re: How will Japan support its retirees when they only have 1 worker for every retiree? T
They won’t: they will have plenty of workers because in 40 years they will have robots working for them. America and Europe are dealing with this issue by importing foreign workers. That’s anathema to the quite xenophobic (or less politely, racist) Japanese so they are creating the workers they out of circuitry instead.
And in case you doubt that this can be a viaible strategym, consider that back when our own country was founded we needed ten farmers to feed one non-farmer. Nowadays that ratio is more than inverted: one farmer can feed more than ten non-farmers. Farmers themselves haven't gotten better, instead they have lots and lots of mechanical help.
Megan - it's not all about the US
doesn't Japan import about 100% of their oil?
doesn't the falling dollar hurt the competitiveness of their exports?
You have to figure those things took the wind out of their sails, plus their populace is older, wealthy and generally owns everything it needs.
Megan, please stop reading the Financial Times so much. They view US consumers as the source of all economic activity and woe. It is the FT's version of Marx' Labor Theory of Value.
... it represents the first quarterly contraction in a year.
Wow, by their standard of the last 15 years they've been booming along!
Will Allen and winterspeak,
Yes, but I wish US Federal debt was still as prime as it used to be.
"And that will generate more income for the government programs supporting the elderly without a prohibitively high tax rate how? I have just enough econ background to know it's a nightmare scenario. The compounding "inflation" (likely not the right term) caused by the higher tax rates required to fund programs will make the cost of living prohibitively expensive. As younger workers flee the cost of living (and said cost of living disincentives immigrants) the problem compounds exponentially until implosion or massive cuts in socialistic programs.... angering the older class who "paid for it already" during their working years.
And considering that Japan has national health care, and older people require more and more expensive care.....
Posted by Demonspawn | August 13, 2008 4:19 PM"
And even if these problems are destroyed or never existed, you get into the situation Ireland was in before the pill and wider acceptance of birth control: each worker or married couple of workers will have to pay for their parents (4 people, if all alive) and children (about 1 person in Japan), meaning a single income will likely have to support at least 3 people and possibly 3.5 (if there is at least 1 child) or more. Such a ratio is what helped keep Ireland poor before societal liberalization and economic reform and is just about the ratio seen in many poor parts of Africa. Add in how Japan hasn't really had great economic growth since the late 1980's, a lot of anger and social problems among the youth and its lack of immigration that could keep the population young and things look grim.
"They won’t: they will have plenty of workers because in 40 years they will have robots working for them. America and Europe are dealing with this issue by importing foreign workers."
Well, that's great. The US and Europe import "workers" who make less than they cost in government benefits and this is a solution to an aging population? At least Japan has noticed that they're in a hole and has chosen to not start digging.