It’s been widely reported that despite significant economic action Japan has now slipped back into a state of recession, with the news coming at the same time as David Cameron delivers stark warnings about the stability of the global economy. With the UK just about keeping its own economic growth on track, there will be many that see the situation in Japan as an indicator that there are going to be more challenges still to come for global economics, especially considering the relative instability of the Eurozone.
Japan’s plight comes on the back of a period of solid growth from the country following the difficulties it faced during the Japanese earthquake, tsunami and nuclear disaster in 2011. However, the introduction of an increase in sales tax in April 2014 from 5% to 8% has led to a reduction in consumer spending within the country, sending it into its current recessive economic state.
While some commentators have described the tax increase, which was put into legislation prior to the election of Japan’s current Prime Minister, Shinzo Abe, as a calculated risk based on the economic growth that had started to build, the reality is that the country’s budget deficit and national debt will have forced their hand to some extent. The country has drastically needed to raise coffers to plug their public finance gaps for some time now and the increase in tax was seen as the solution to the problem by the previous government.
Another rise in sales tax had been planned to take the figure up to 10% in the not too distant future, but Mr Abe is expected to initiate a surprise election to build support to pull the plug on the plans. The political commentators indicate that there is ever likelihood that he will be successful if or when the election takes place, giving the Prime Minister the changes he needs to halt further reductions in spending and more severe economic downturns.
The Prime Minister’s slightly unconventional economic models, which have gained the nickname Abenomics, had been much publicised for their success in turning the third largest economy’s fortunes around after the global recession in 2011. Upon his election win into the hot seat he instigated a radical economic plan that included significant government spending to stimulate the economy coupled with a whole lot of quantitative easing (the government literally creating new money electronically and using them to buy assets – government bonds – in private sector organisations) to nudge up public spending and manage inflation.
While the ambitious strategy had appeared to be working in terms of GDP growth, the reality is that the wealth generation wasn’t passed down to everyday people in Japan, so when the tax rise kicked in consumer spending took a nose dive and pushed the economy into recession. While exporting businesses profited from the improved economic situation and the lower value of the yen driven by the new electronic money from the government, they didn’t pass that on to their employees enough for it to compensate for the tax rise. Business held on to their money and so have consumers, so the economy has started to shrink once again.
Equally, the purchase of government bonds (quantitative easing) reduced yields in this type of investment, pushing investors into stocks and shares, resulting in growth for the Japanese markets. However, again this only profited a select number of wealthy investors, so again the wealth didn’t distribute enough to stimulate spending through the tax increase.
Nor, would it appear, did the government spending increases, which will have also damaged the Japanese budget balancing, so ultimately, based on the last two months of technical recession for the Japanese economy, it looks like Abenomics have culminated in bad news for the books and bad news for economic growth. The challenge now will be to secure the vote needed to block further sales tax rises and set in place measures to ensure that the government’s capital injections are passed on into the hands of the workers of country to return spending to a beneficial position.
The situation in Japan is the latest indication that global economic stability is still tenuous at best, adding to the stagnation in the Eurozone and bolstering the validity of David Cameron’s calls for caution over the condition of the world economy. It will add a lot of weight to his argument in favour of more austerity measure and spending belt tightening, but could play a negative role for him in the election in 2015 if he can’t persuade the voting public that he’s made a contribution to the UK economy during his 4 years in office.