Japan’s false starts
Tokyo's Skyline
In the second quarter of 2009 the Japanese economy grew by 0.9% compared to the previous quarter. This is positive news, and a bigger increase than the 0.3% that France and Germany reported last week. Analysts’ reaction was rather cool and the Tokyo Stock Exchange took a nosedive.
The chart below shows economic growth in Japan, the US, Australia and the Eurozone from 1995 till the end of 2008. 1995 is used as the base year with the graph plotting the percentage increase in GDP for each economic zone. Australia has been growing the strongest of the four with an average annual growth hovering around 4.5%. The 16 countries that are part of the Eurozone posted decent growth averaging 2.5% annually.
After the economic heydays of the 80s, Japan’s economy went into a slowdown from 1991 onwards. This chart clearly shows three times that the economy appeared to have taken off. Each time GDP increases were followed by a significant slowdown.
GDP Growth - Base Year 1995
The first spur was in 1995 and 1996 with 2% of economic growth. In 1997 the Asian crisis broke out, taking Japan into negative growth in 98 and 99. Japan was affected by a decrease in exports and reduced income from overseas operations due to the strong Yen.
In 1999 the Bank of Japan introduced a zero-interest-rate policy effectively making the overnight call rates zero. 2000 was a strong rebound year achieving 2.9% growth, followed by the infamous year 2001 with another dive to stagnating GDP. The economy was back on track from 2003 to 2007 with annual growth figures between 1% and 3%. When the crisis broke out in 2008, Japan was the first economy to be hit hard even though its financial system was largely unaffected by the sub-prime mortgage soupe.
The 0.9% growth Japan achieved in the second quarter is therefore a positive sign and a good indication the worst of the GFC is behind us. Given Japan’s multiple false starts, it is uncertain whether this will be their onramp for future solid growth. Prime Minister Aso said Japan is halfway to full recovery which would take three years. Let’s hope another 18 months is all Japan needs to leave the long Heisei recession behind.