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    Japan's Prime Minister Shinzo Abe speaks during a news conference at his official residence in Tokyo September 25, 2015

    Recession Hits Japan for Second Time Under PM Abe

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    The Japanese economy slid into recession in Q3, demonstrating that the Abe cabinet is too slow to react to global challenges, while the promised ‘Abenomics 2.0’ is lagging.

    Kristian Rouz – Japan’s GDP data for the third quarter indicated another contraction after a lackluster Q2, meaning the island nation has slid into recession for the second time since Prime-Minister Shinzo Abe was elected in late 2012. While it is still too early to determine whether ‘Abenomics 2.0’ would prove an efficient solution to Japan's structural weakness, the recession might actually be short-lived as certain macro indicators suggest a recovery as soon as in the fourth quarter.

    Japanese GDP dropped 0.8% year-on-year in Q3 after an adjusted decline of 0.7% in the previous quarter, indicating a full-blown economic recession. Previous forecasts suggested a 0.2% contraction in Q3, however, the combined negative effect of weak business confidence, a drop in inventories and global headwinds has squarely hit the Japanese economy.

    Business investment weakened in September, contributing 0.2% to the broader economic contraction. At 68 trln yen that month, Japanese business investment is still way above its 2010 lows of 60 trln yen, but significantly below its record high in late 1990 at 95 trln yen.

    The slump in investment is a major challenge for the Abe cabinet as the PM had previously attempted to encourage the nation’s companies to increase capital spending. Business investment alone dropped 1.3% in Q3 after a 1.2% decline the previous quarter.

    A drop in Japanese inventories contributed to a 0.5% decline in the broader economy. Albeit a positive signal to the commodities markets (the Japanese companies have exhausted larger portions of national oil and raw material stockpiles), an inventory decline is an alarming signal to the Japanese economy: the companies are losing confidence in their commercial performance and sales volumes as overseas risks linger.

    Personal consumption was a bright spot for the Japanese economy, adding 0.3% to the GDP. Amidst the persistent disinflation and low commodity prices, Japanese households can afford more goods and services. The services sector is thus poised to expand while the industrial production might wither away as the Chinese slowdown and global headwinds are forcing Japanese manufacturers to decrease spending and output.

    Later this week, the Bank of Japan (BoJ) is holding a policy meeting, and it is likely to expand its already massive monetary stimulus in order to overcome the economic downturn. Meanwhile, the Abe cabinet might enact further fiscal stimulus, including cuts in corporate tax.

    As outlined in a recent statement by BoJ Governor Haruhiko Kuroda, the current objective is to weaken the yen and boost corporate profits. Meanwhile, the BoJ is expecting the inflation trends to improve without adding stimulus, as Japanese businesses will have to buy commodities due to their empty inventories.

    This might be the turning point: with inventories at their lowest and commodity prices below multi-year averages, an improvement in cost-efficiency might be in line for most Japanese zaibatsu and smaller enterprises.

    “Today’s number isn’t as bad as it looks. Without inventories, GDP could have been a positive figure,” Masamichi Adachi of JPMorgan Chase & Co. said. JP Morgan are expecting a 1% economic expansion in Q4 as business activity is poised to increase.

    However, Japan’s industrial inventories had not dropped significantly in Q3. According to Ministry of Economy, Trade and Industry, in September the total volume of inventories stood at 114 trln yen, higher than that in March, at 105 trln yen, and above their March 2011 lowest at 91 trln yen. They are still below their January 2009 highest of 123 trln yen.

    Economy Minister Akira Amari, who is now working on Abe’s promised 20% boost to the Japanese GDP by 2020, said a structural reform might be necessary to bolster the efficiency of Japan’s economy. Among the measures he suggested, were a revision in demographic policies, and more flexibility in fiscal and monetary policies.

    Given that Japan’s financial market are stronger than ever, with massive gains in stocks recently, there is a widespread optimism of a recovery soon. Still, ‘Abenomics 2.0’ must be an explicitly pronounced set of policy measures, most of which are still in the works.

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    economic recession, economy, Shinzo Abe, Japan
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