Japan sinks back into recession

Japan is slipping into its fifth recession in 15 years. The economy shrank by 0.9% in the third quarter, 3.5% on an annualised basis. Exports slumped by 5% quarter-on-quarter. Private consumption fell at its fastest rate since early 2011. Business sentiment is at its worst since the tsunami in March last year.

The economy is expected to shrink for a second successive quarter between October and December, marking an official recession.

What the commentators said

The weakening global economy, the strong yen and the spat with China caused the sharp drop in exports, noted Capital Economics. On the domestic front, the end of the government's subsidy for fuel-efficient vehicles made nervous consumers even more reluctant to spend. The only part of the economy that expanded was government spending, as ongoing post-tsunami reconstruction underpinned investment.

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But the pace of reconstruction is now slowing. So it's hard to see where growth can come from. There is certainly "nothing left in [policymakers'] toolboxes capable of jump-starting growth", as Takashi Nakamichi put it in The Wall Street Journal. Public debt has reached a staggering 237% of GDP and the government is supposed to be reining it in by raising the sales tax. And while fiscal policy is a non-starter, monetary policy has proved impotent.

The Japanese economy, in nominal terms, is the same size as it was in 1993, said James Saft on Reuters.com, "hardly a ringing endorsement of campaign after campaign of quantitative easing". The problem is a lack of private demand for credit, which means that simply making more money available by slashing interest rates or printing it doesn't stimulate growth.

That's the key lesson of the last 20 years in Japan, said Richard Koo of Nomura "and of the last four years in Western economies". Japan desperately needs a weaker currency, said FXPro.com. The trouble is that if global risk aversion continues to rise, the yen probably will too, as it is highly liquid and still seen as a haven. So despite the poor fundamentals, "those betting on a softening yen may continue to require boundless patience".