AP Covers Up Japan's Likely Slippage Into Another Economic Contraction

In an early Wednesday morning report containing an undercurrent of amazement and frustration that Japan's journey into Keynesianism and quantitative easing on steroids somehow hasn't worked, the Associated Press's Elaine Kurtenback wrote that a steep "April 1, 2014 sales tax hike ... triggered a brief recession and growth since has been flat."

The Land of the Rising Sun with the long-stagnating economy should be so lucky. Six days ago, the Wall Street Journal reported something Kurtenbach should have known when she submitted her writeup, namely that the country is once again on the brink of slipping into contraction:

Japan on Brink of Another GDP Contraction

With a booming stock market, falling oil prices and promised pay raises at big companies, Japan’s economy must be doing well, right?

Actually, no. Monthly gross domestic product contracted a sharp 2.1% in February from the previous month, the biggest drop since April last year, raising the specter of another quarter of economic contraction in January-March, according to data released Wednesday by the Japan Center for Economic Research, an independent public policy institute.

According to JCER’s calculations, the economy now needs to have grown 1.5% in March just to equal the fourth quarter’s output. But that seems a difficult task. The Ministry of Economy, Trade and Industry has forecast that industrial output is expected to have declined in March, before recovering in April.

If gross domestic product indeed shrinks in the first quarter, it would be the third contraction in the past four quarters–quite a lackluster performance given Prime Minister Shinzo Abe’s vow to revive strong growth and decisively defeat deflation.

What’s to blame? Weak private consumption, said Tetsuaki Takano, an economist with the institute.

Really, it's the fault of those dumb consumers who won't spend their money to prop up an economy whose fundamentals remains weak. (Expect to hear that chorus here in the U.S. if the economy remains flat or worse into this year's second quarter.)

The AP's Kurtenback applied as much window-dressing as she could in the circumstances:


Two years after launching a bazooka of ultra-lavish monetary easing, Bank of Japan Gov. Haruhiko Kuroda has made only fitful progress toward the goal of the 2 percent inflation rate he and Prime Minister Shinzo Abe said was needed to jolt the world's No. 3 economy out of its deflationary rut.

Kuroda increased central bank purchases of assets last fall and splashed still more cash on the economy last autumn, but faces mounting pressure to open the taps further. The central bank left that policy unchanged following a meeting that ended Wednesday.

... Just after taking his post in April 2013, Kuroda announced the central bank would vastly expand its purchases of government bonds and other assets, keeping interest rates near zero and seeking to push inflation toward a 2 percent target within two years. The idea was to convince consumers and businesses to spend more money, sooner, to beat price increases. Meanwhile, the government promised to increase public works spending and carry out sweeping reforms to counter stagnation and fading competitiveness.

As seen in the graph below, a more correct headline would have told readers that "Japan's Economy Is Barely Better after Two Years of Horred Economic Policy" (figures presented represent actual growth or contraction, and are not annualized as they typically are in the U.S.):



The highly likely slippage into contraction shows that what has been called "Abenomics," named after the country's current prime minister, hasn't led the country to anything resembling improved performance. The numbers since the second quarter of 2013, without compounding, add up to +0.5. Even the slightest contraction in the first quarter will mean that the nation's economy has grown only 0.2 percent per year for the past two years. A half-point contraction in the first quarter would bring it zero.

Meanwhile, this non-accomplishment has, as Kurtenback noted but downplayed, jeopardized the nation's finances even further:

Thanks to lavish spending, a weakening tax base during two decades of stagnation and soaring pension and social benefits costs for its aging population, Japan has a bigger national debt relative to its economy than even Greece. Most of that debt is held domestically, not owed to foreigners, and is not considered high-risk. (*) But there are limits to how much money the central bank can print and spend without spooking investors, and Japan faces strong pressure to shape up its national finances. In the meantime, the poverty rate has been rising as growing numbers of employees fall into the "precariate" - contract workers on low wages, with scant or no social benefits and minimal if any savings.

(*) - Ah yes. The old "we owe it to ourselves, so it doesn't matter" argument. Too bad that in the real world the debt either has to be repaid, regardless of who holds it. That's a virtual impossibility in the short-term. The alternative is to refinance the debt, which is by no means certain, especially at "risk-free" rates.

The business press has ever lose faith in Keynesianism no matter how many times it has been tried and failed. The fact that nearly a quarter-century of stagnation in what was once thought to be an unstoppable economic juggernaut won't change their minds would seem to indicate that they never will.

Cross-posted at BizzyBlog.com.

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