November 16, 2015, 12:30 JST

Japan had 3 recessions in the last 5 years

The Japanese economy shrunk by 0.2% quarter on quarter (qoq) in the July-September 2015 quarter, or 0.8% after annualization, according to the Cabinet Office. The result was mostly in line with the prior forecast by economists. 

The decline follows the 0.2% decline in the April-June quarter and put Japan into a technical recession. We would emphasize the word "technical" though, and the news should surprise nobody. Many, including ourselves long anticipated the likelihood as we wrote in "Japan in recession this summer" at the end of September. With the ongoing shrinkage in the working population, Japan's potential GDP growth is virtually zero. Having a zero or slightly negative growth is hardly extraordinary for Japan nowadays. In three out of the last five years, Japan had a recession, technical or real.

A breakdown of GDP components reveals that the change in the private inventory was the chief reason for the decline in the overall GDP. When private sector reduces its inventory, the GDP statistics consider it as a reduction in investments, causing GDP to shrink. Other components did not do too badly in the quarter. Private consumption expanded by 0.5% qoq, exports grew by 2.6% qoq. Private capital expenditure shrunk by 1.3% qoq, however. The shrinkage is a major concern. The expansion in private capital expenditures is a critical element if Japan is to transition to a sustainable growth. Its expansion will also raise Japan's potential growth rate.

The fact that it is not growing, despite the historical profitability of Japanese corporations, shows that Japanese corporate managers are not at all convinced in the virtue of investing in Japan in the long term. It is another indication that Abenomics is not working.

The results from the GDP statistics is unlikely to alter the Bank of Japan's currently held view that Japan is still on course to reflate itself. The domestic demand deflator, an equivalent of CPI for the whole economy, showed 0.2% qoq inflation in July-September, a marginal acceleration from 0.1% qoq in April-June. While the BoJ must be discontent with the negative growth, the performance of the Japanese economy is not weak enough to prompt the BoJ to take an easing action.

The Abe cabinet is likely to use the "technical" recession as an excuse to compile a supplementary budget. However, we do not think it will be powerful enough to add any meaningful boost to the economy. Some subsidies to the agricultural sector, some token measures to help Womanomics posturing, another doling out for construction sectors, probably. Something to help the government win sympathies ahead of the Upper House election next summer, but no meaningful boost to the economy.