Japan’s 2008 Economic Performance Holds Key for 2009 Outlook

ESCAP’s annual survey analyses region’s challenges, proposes solutions

Bangkok (UN/ESCAP Information Services) – For the Japanese economy, 2008 provided a stark contrast to 2007 when it recorded continued economic growth despite the financial crisis in the U.S.A. and Europe. Nonetheless, with a deepening global recession and further deterioration of business confidence, the growth rate was negative in the second quarter of 2008, with Japan’s economy contracting by 3.3 per cent in the fourth quarter of 2008 (on a quarter-to-quarter basis), making the country the hardest hit among the Asia-Pacific region’s developed economies, according to the Economic and Social Survey of Asia and the Pacific 2009.

This year’s edition of the flagship publication of the United Nations’ regional arm – the Economic and Social Commission for Asia and the Pacific (ESCAP) – is entitled "Addressing Triple Threats to Development”. It analyzes the three global crises which have converged to threaten development in the Asia-Pacific region: the economic crisis, fuel and food price volatility, and climate change. The Survey provides a regional perspective as well as country-specific analyses, outlining ways in which economies in the region can move forward towards a more inclusive and sustainable development path.

The Survey notes that the drastic downturn in Japan is driven by the country’s dependence on exports for its economic growth. Over the past few years, economic growth had been buoyed by robust export growth; hence, the subsequent sharp fall in demand for exports had a damaging impact on the economy. The recession in the U.S.A. and Europe reduced their demand for Asian products, which eventually led to a significant reduction in Asia’s demand for Japanese products. By the fourth quarter 2008, the fall in exports took on dramatic proportions – contracting 26.5 per cent in November 2008 (on a month-on-month basis).

Domestic demand was of little help. Both business confidence and consumer confidence plunged during 2008. Household consumption further weakened in the absence of income growth. In addition to sluggish wage growth, a surge in oil prices pushed up consumer price during the year and reduced real incomes as a consequence, although the fall of oil and commodity prices and recession led to concerns over possible deflation by the end of the year. The unemployment rate crept higher as the recession deepened and firms started cutting labour force, further dampening consumer sentiment.

Policy response centres on three-pronged stimulus package

The deepening global downturn and consequent deterioration of the Japanese economy has resulted in the Government relaxing its fiscal consolidation agenda for the time being. Although the budget deficit narrowed in recent years, the proposed budget for the fiscal year of 2009 indicates a seven per cent increase in expenditure.

So far, the government has announced plans for economic stimulus packages of approximately 75 trillion yen in total, consisting of 12 trillion yen (about two per cent of GDP) fiscal measures and 63 trillion yen financial measures, within the two supplementary budgets for the fiscal years 2008 and 2009. The package embraces three components: assistance for consumers, assistance to small- and medium-sized enterprises, and revitalizing regional economies.

On monetary policy, while the Bank of Japan cut the target for the overnight call rate to 0.1 per cent in December, the country’s past experience of extremely accommodative monetary policy has cast doubt on the effectiveness of the rate cut and the Bank of Japan has explored other measures to ensure liquidity for the corporate sector, especially for small- and medium -sized businesses.

Poor outlook as external and private demand weaken

The economy contracted by 0.7 per cent in 2008 and is expected to contract by 2.5 per cent in 2009. For Japan, besides the challenge of moving out of recession, medium-term policy challenges – such as fiscal consolidation and reform of social welfare system – will remain daunting. The Survey notes how challenging it is to restructure a social safety net which will be sustainable, resilient to large shocks and protects vulnerable groups.

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The Economic and Social Survey of Asia and the Pacific 2009 is available online from 0500 GMT/1200 Bangkok on 26 March at: http://www.unescap.org/survey2009/index.asp

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