The Japanese government announced that their economy shrank by 0.8% in the second quarter of the year and therefore into recession for the fifth time in seven years.
The announcement of the figures that covered economic growth (or the lack thereof) from July to September of this year came on the heels of a 0.7% loss in the previous quarter.
The back to back contractions have sent a shockwave across the world’s third largest economy and may increase the pressure on Japan’s Prime Minister Shinzo Abe and his tough fiscal policies.
Abenomics as the suite of policies are referred to, is basically a shock therapy meant to revive the stagnant growth rates in Japan.
“The central plan is built on unprecedented monetary easing, government spending and business deregulation to snap Japan out of its malaise. He calls it a “three-arrow” strategy, borrowing the image from a Japanese folk tale that teaches that three sticks together are harder to break than one.”
A recent IMF study on Abenomics made it clear how much was at stake for Japan, and how hard it would be for the Prime Minister to actually pull it off.
From the IMF study:
“What was being attempted under Abenomics was unprecedented, and nothing less than a leap from a low-growth deflationary equilibrium to a new equilibrium characterized by positive inflation and higher sustained growth. This requires a parallel shift toward more risk taking, requiring changes in expectations and behavior by businesses, consumers, and financial institutions. Confidence would be key, in both Japan’s growth prospects as well as the government’s ability to carry out needed reforms.”
So what caused the retraction and most recent recession in Japan?
“A big drop in inventory was the largest factor behind a third-quarter contraction. Weak capital spending was a concern, but excluding these factors, the GDP figures were not so bad,” Takeshi Minami, the chief economist at Norinchukin Research Institute told Reuters.
Despite the bad news, Japan is somewhat used to the up and down nature of growth in the country and faces larger long term causes for the crisis- including a dangerously rapidly graying nation.
But will Abe and his bold form of reform survive to find another day? Only time will tell.
Cover Photo Credit: Presidencia de la República Mexicana/ Flickr (CC By 2.0)