Thursday, February 19, 2009

Japan is taking a beating

Countries that depend on export growth to fuel overall economic growth are taking a beating, especially Japan. In the current global recession scenario, international labor markets, incomes, production, and profits are contemporaneously declining. Not good for any country that depends on foreign demand. But worse yet, the yen remains elevated, reducing foreign demand even further.

The Japanese economy is plummeting

The chart illustrates Japan's real GDP in levels (yen tr.) and in growth (% y/y) since 1995 (data here, if you are interested). In the fourth quarter of 2008, Japan posted its biggest decline since 1974 (see Bloomberg article). The economic retrenchment is bigger than throughout its entire "lost decade" (roughly the 1990's). A sharp drawback of global demand - especially from the U.S. - is dragging Japanes GDP down quickly.

GDP fell largely on exports, which account for an average of 17% of overall domestic production (GDP) in the last three years. In the fourth quarter of 2008, real exports fell 13.9% since Q3, which is a massive 45% annualized decline. Anemic global demand is killing Japan.

But it's also investors - the unwinding of the carry-trade (borrowing at low interest in Japan and buying at higher interest in, let's say, Europe) is appreciating the yen and causing exports to fall further.

A surging yen is killing export growth

The chart illustrates the trade-weighted yen on a weekly basis spanning the years Jan. 2003 to Feb. 2009. The yen has increased over 30% since just Aug. 2008.

Domestic industrial production is in free fall

The chart illustrates Japan's industrial production on a monthly basis spanning the years Jan. 2003 to Dec. 2008 (source data here). This is a rather humbling visual: industrial production - Japan's bread and butter - declined 20% since September 2008, or near a 50% annualized decline. In December 2008, Japan's industrial production sector was producing over 15% below its 2005 average rate of production. Against this backdrop, the 10% annual decline in U.S. industrial output looks like a benign report.

The unemployment rate is surging

The chart illustrates the unemployment rate in Japan spanning the years Feb. 1995 to December 2008. Over the last two months, the unemployment rate grew 0.7% to 4.4%. Temporary workers with no benefits represent the bulk of the layoffs, which will likely bring down average welfare.

The global recession is leaving no stone unturned.

Rebecca Wilder


  1. Rebecca,

    The unemployment spike is similar to the one in '98. But look at the exports chart! In '98, exports surged (on the back of a weak Yen?), and that provided a ceiling for unemployment growth (5.5%). What will happen this time? Your export growth chart says, "expect unemployment to exceed 7%."

    How long will it be before Japan decides it needs to devalue the Yen at all costs? A decision by MOF to issue Yankee Bonds in size would contribute to crowding out in the dollar debt markets.

    We're all fixated on the Smoot-Hawley analogy, but protectionism has many faces, and one is the Yankee bond. Maybe the Swiss are just on the vanguard of this trend.

  2. Nice information. Thanks. i'm not an economist, but I spend an inordinate amount of my day reading economics related information. Plus I'm in Southern New Hampshire (Manchester) so I like that you're in Southie. Boy South Boston must have changed. Everyone I knew from Southie more resembled (or actually was)a longshoreman.

    Anyway. China must be heading into some serious trouble. And with 1.3 billion people, it may be stunning trouble.

  3. Hi David, Thanks for the analysis! An unemployment rate of 7% would definitely push the Japanese to do something crazy. There are so many permutations to the outcome of this recession!

    Hi Beezer, Southie has been gentrified a bit, but don't worry, there are plenty of accents to contend with here.