The news that Japan, the world's third largest economy has slipped into a technical recession is not only grim for Tokyo but for the world economy and particularly the sluggish eurozone. Of the four great engines of global economics, only the US and China are showing significant growth and doing the sort of heavy lifting that can give a badly needed filip to demand.
The danger is now that Japan, struggling to pick its own growth up by effectively printing money, will continue to drive down its currency’s value, exporting deflation to the rest of the world and triggering competitive depreciations. The euro is particularly vulnerable, while Japan’s experiment and experience with reflation is also being debated here as a model for Europe’s stalling economy.
Monday’s data for July-September show the Japanese economy shrinking by 1.6 per cent quarter on quarter, against an expected 2.2 per cent growth, and show the country entering its fourth technical recession – two successive quarters of declining GDP – since the Lehman crisis.
The reverse represents a serious setback for Prime Minister Shinzo Abe, his Liberal Democratic Party government, and "Abenomics", his attempt to revive the economy through doses of the "three arrows", fiscal expansion, quantitative easing (QE), and slow-to-come structural reform of the labour market. Mr Abe had won power two years ago on a promise to pull Japan out of nearly two decades of corrosive wage and price declines
Part of the recipe involved the controversial raising of consumption tax last April to help balance the public finances, but a first round of increases has had the effect of hobbling consumer demand and shrinking the economy – the consumer sector amounts to two thirds of it.
It now appears likely Mr Abe will call a snap general election to secure a continued mandate for his medicine, a risky move that, despite a divided opposition, could also leave him without a clear majority for either the second consumption tax rise, now pushed back to April next year, or the structural reform, both unpopular measures unlikely to feature centre-stage in his election campaign. If anything Mr Abe will be forced to characterise the sales tax as a measure devised by the opposition when it was in power. International investors like his approach but figures show they remain to be convinced by implementation.
Most crucially, Mr Abe and the Japanese central bank remain committed to stimulating the economy, with economists suggesting that he has room to do so by as much as $35 billion. European advocates of stimulus – aggressive ECB buying of bonds – will be keen to see him continue down this path, convinced that if Japanese growth has been stifled it has more to do with the depressing of consumer demand and delayed structural reform than with such stimulus measures .