Jay H.

Bryson, Global Economist

jay.bryson@wachovia.com ● 1-704-383-3518

February 17, 2009

Japanese GDP Plunged in Fourth Quarter

A collapse in exports has contributed to the worst Japanese recession since the end of the Second World War. With
few policy tools at the government’s disposal, Japanese economic prospects will depend crucially on growth in the
rest of the world.
Japan in Worst Slump Since the End of the Second World War Japanese Real GDP
Recently released data show that Japanese GDP plunged at an annualized 10.0%
Bars = Compound Annual Rate Line = Yr/Yr % Change
10.0%
rate of 12.7 percent in the fourth quarter relative to the previous quarter 7.5% 7.5%
(see top chart). The methodology to calculate Japanese GDP changed in 5.0% 5.0%
1994, but it appears that the plunge in the fourth quarter was the sharpest 2.5% 2.5%
rate of contraction since the first quarter of 1974. Relative to the fourth 0.0% 0.0%
quarter of 2007 real GDP fell 4.6 percent, making the current slump the -2.5% -2.5%
worst downturn since at least 1955 (probably since the end of the Second
-5.0% -5.0%
World War).
-7.5% -7.5%
There were no bright spots in the GDP data. The single biggest contributor -10.0% -10.0%
to the sharp drop in overall GDP was the 45 percent annualized plunge in Compound Annual Growth: Q4 @ -12.7%
-12.5% -12.5%
exports that is consistent with the nosedive in industrial production in the Year-over-Year Percent Change: Q4 @ -4.6%
-15.0% -15.0%
fourth quarter (see middle chart). Japan is an important supplier of capital 2000 2001 2002 2003 2004 2005 2006 2007 2008
goods to other Asian countries, and the collapse in global trade in the wake
of the credit crunch has hit the Japanese economy especially hard. Non- Japanese Industrial Production Index
Year-over-Year Percent Change
residential investment spending in Japan also fell sharply in the fourth 10.0% 10.0%

quarter, contracting at an annualized rate of 20 percent. Consumer

5.0% 5.0%
spending fell 1.6 percent.
The good news is that the Japanese economy will probably not continue to 0.0% 0.0%

shrink at the same rate that it did in the fourth quarter. For starters, it is -5.0% -5.0%
unlikely that exports will continue to nosedive at the same rate in the
quarters ahead. In addition, imports rose 12 percent in the fourth quarter, -10.0% -10.0%

which probably helps to explain the rise in inventories. Imports will -15.0% -15.0%
probably decline significantly in the quarters ahead as businesses attempt
to pare back unwanted stocks. -20.0%
IPI: Dec @ -21.7%
-20.0%

3-Month Moving Average: Dec @ -13.9%

The bad news is that Japanese policymakers have few tools at their -25.0% -25.0%
disposable to stimulate the economy. Late last year the Bank of Japan (BoJ) 1997 1999 2001 2003 2005 2007 2009

cut its policy rate from 0.50 percent to 0.10 percent. Even if the BoJ goes all
Japanese Exchange Rate
the way to zero, only 50 bps of monetary easing will do little to bring about JPY per USD
150 150
a self-sustaining recovery. Two decades of worth of sluggish growth and
fiscal stimulus has caused the government debt-to-GDP ratio to rise to 140 140

more than 170 percent, constraining the ability of the government to prime
130 130
the pump via even more fiscal spending. The fate of the Japanese economy
over the next year or two will depend largely on economic growth in the 120 120
rest of the world, which isn’t looking too good at present.
110 110
In that regard, the strength of the yen versus most currencies does not help
Japanese exports (see bottom chart). Although we look for the yen to give 100 100

up some of its gains over the next few quarters, Japanese export growth
90 90
will probably be very sluggish for the next few quarters. Therefore, the
JPY per USD: Feb @ 91.9
Japanese economy likely will remain mired in deep recession for the 80 80
1995 1997 1999 2001 2003 2005 2007 2009
foreseeable future.

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