After improving economic prospects earlier this year, Japan has abruptly reversed course. A third-quarter annualized GDP reading of negative -.8% puts Japan back in a technical recession (defined as two quarters of negative GDP growth).
Following stimulative policies (aka “Abenomics”) by Prime Minister Shinzo Abe and a blossoming recovery from 2014’s technical recession, many assumed Japan was headed straight into expansion — so the contraction was unexpected.
Japanese policymakers call it a temporary pullback and say conditions should improve in 2016. But the reality is Japan’s been stuck in a slow-growth slump for decades. According to The World Bank, since 1999 Japan’s real annualized GDP growth has only surpassed 2% three times, and real average annual growth has had a 1 handle.
Despite aggressive monetary and fiscal policies like zero-bound interest rates (“ZIRP”) and heavy deficit spending, Japan’s growth prospects remain stubbornly dismal. And in the process, Japan has also accumulated the highest debt to GDP ratio among developed nations. Yet somehow Japan continues to muddle along.
Honestly, Japan’s experience sounds eerily prescient of what the US may be in store for. Since the financial crisis of almost a decade ago, the US has taken aggressive stimulative measures of its own, but we’ve yet to experience the “v-shaped” recovery of expansions past. Along the way many have suggested that that the US is in a “new normal” period of slower economic growth — and so far they’ve been right.
This month it is widely expected that Chairwoman Janet Yellen and the Federal Reserve will finally commence a “lift-off” from an extended period of abnormally low short-term interest rates. A small, expected rate increase is unlikely to have a significant impact on the markets or the economy. At this point, an initial rate increase may have a more psychological impact than anything. It shows the Fed has confidence in the US economy, that it believes the US is strong enough to withstand a rate rise, and that maybe, just maybe, we’re not following in Japan’s footsteps after all.
Victor K. Lai, CFA
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