On November 18th 2008, the world’s second largest economy, Japan, announced that it had officially entered a period of recession. A drop in GDP of  0.1% in the second quarter marked the first recessionary phase for the Japanese economy since 2001, when the country was feeling the after effects of the dot-com bubble in the US. The government has said that the current recession is the most serious crisis in the economy since the Second World War.

In March 2009, exports plunged by 49.4 %, the sharpest drop since 1980, when records began. Japan’s major exports are cars, electronic goods and machinery and their car-makers, Toyota, Nissan and Honda were hit badly by the economic downturn. Increasingly reliant on a global market, Japanese car shipments to the US fell a staggering 71% in March. In a desperate effort to save jobs whilst reducing productivity, the companies have taken drastic measures including:

• reduced working hours
• unpaid leave
• 10% pay cuts to workers in USA, UK and Poland
• temporary factory closures

Workers in electronics firms are also being hit hard. Pioneer recently announced 10,000 job cuts, whilst Sony announced a further 8000.

Japan Economy In Recession

What were the causes of the current recession in Japan?

Shrinking Global Demand

The shrinking of the Japanese econmy is a classic case of “globalisation in reverse”. For many years the USA, high on an economic boom, was the major customer for cheaply manufactured Chinese goods, as well as Japanese cars, and electronics. As the US  stopped spending, Chinese factories  closed and the Japanese economy, so heavily reliant on the US market began to shrink.

A High Currency

Economists call 1990’s Japan’s “Lost Decade”. GDP was low and in an attempt to combat recession, the government decided to drastically lower the interest rates on borrowing its currency, the yen. It then bought US treasuries, keeping the yen low and exports competitive.

This fueled much speculation in the yen as an investment opportunity. By borrowing the yen at low interest rates and investing in much higher yield currencies, such as the dollar, substantial profits could be made. This yen “carry trade“  created liquidity and mobility in the global financial markets and became popular amongst  hedge funds and many other investment vehicles. However, when the carry trade collapsed, the value of the yen rocketed, causing Japanese exports to be overpriced in a global slump.

How can the Japanese economy recover?

Prime Minister Aso has already pledged hundreds of billion of US dollars in fiscal aid packages. In  a recent TV conference at the G20 summit he announced measures to create 2 million jobs and to encourage the development of eco-business. He said , “We would like to lead the low-carbon revolution with Japanese technologies.”

Given the current global recession however, it is likely that Japan’s economic recovery will be heavily dependant on the fate of it’s global trade partners, the US, Europe and China.