Data Confirm Worst Fears Of Rapid Decline In Japanese Economy

The Cabinet office's first estimate of Gross Domestic Product for the fourth quarter of 2008 revealed today that Japan's GDP declined at a seasonally adjusted annual rate of 12.7%, a full percent above consensus, confirming Kazuo Momma's fears that GDP may have declined at "an unimaginable speed" expressed a week ago. (Kazuo Momma is Head of Research and Statistics at the Bank of Japan.) The decline in GDP in Japan compares with a 5.8% decline in the Euro Area and a 3.8% decline in the United States in the same period, as shown in the first chart.

The sharpest decline was registered in exports, which, on a seasonally adjusted annual rate basis, fell 45.0%. Gross Fixed Capital Formation declined 11.3% and Private Consumption declined 1.6%. The increase in inventories continued to decline. Government Consumption increased 4.9%, the first this year, and imports were up by 12.0%. Increased imports, however, affect GDP negatively.

Japan has been in recession since November 2007 according to a government panel that dates recessions. Attempts to stimulate the economy have been hampered by the already high ratio of debt to GDP (1.70 for Japan in the fourth quarter, compared to 0.75 for the U. S.) and political in-fighting.Kaoru Yosana, Economic and Fiscal Policy Minister, is unwilling to support further stimulus until the supplementary budget for fiscal year 2008 and the budget for fiscal year 2009 have been passed in the Diet and begun to be implemented. Meanwhile gridlock in the Parliament has blocked passage of a 10 trillion yen ($100 billion) stimulus package proposed by Prime Minister Taro Aso.

One surprising result in the data is the increase in the deflator. The first in ten years, as shown in the second chart.