A Bump in the Road

Story Highlights:

• Japan hit a bump in their road to recovery Thursday as the government confirmed the economy slid into recession, with Q1 2011 GDP falling -3.7%.
• Likewise, Q4 2010 GDP was revised downward, tied to the sunset of various stimulus efforts last year.
• It shouldn’t be surprising if the world’s third largest economy continues to languish for some time. Recovery, both economically and physically for the nation, may take some time to play out.
• But a prolonged Japanese economic malaise lacks the power to derail the growth going on elsewhere.

Thursday, Japan hit a bump in their road to recovery—Q1 2011 Japanese GDP missed analyst estimates, falling -3.7% (at a seasonally adjusted annual rate) versus the expected -1.9%. Granted, analyst estimates were difficult to make in the aftermath of the earthquake and tsunami that devastated Japan’s eastern seaboard. Somewhat more surprising was the government’s downward revision of Q4 2010 GDP growth from -1.3% to -3.0%—driven by weaker consumer spending and investment tied to the sunset of various stimulus efforts last year (like a program to spur purchases of eco-friendly appliances). In response, the BOJ announced it would keep its target lending rate at 0.0%-0.1% and maintain current stimulus programs to boost economic activity and help speed recovery and rebuilding—in our view, an appropriate move.

Even so, the world’s third largest economy could continue to languish for some time. It’s widely expected that Q2 2011 Japanese GDP will also be negative—marking the third straight quarterly contraction. However, rebuilding efforts and stimulus measures—like the BOJ’s emergency asset purchase program and disaster area lending facility—may begin to take hold by Q3 2011. Also positive, the power outages and rolling blackouts caused by the shutdown of many of its nuclear reactors have largely ceased—possibly helping abate supply chain disruptions, which have plagued the country’s manufacturing capabilities.

While Japan faces a rough road, the global impact should be far less. Japanese growth has lagged the rest of the developed world overall for much of the last two decades—while the rest of the global economy has grown just fine. Today, economies like China, India, the US and core-Europe continue to experience strong growth. Interestingly, Japan’s neighbor China faces almost the exact opposite problem. The Chinese have struggled to manage inflation because growth is so strong (and because, in a command economy with a heavily managed currency, they have to get creative about monetary policy tactics—but that’s a subject for another column.) Taken as a whole, China’s rapid growth more than offsets Japan’s contracting economy on the global scale. What’s more, Japan benefits from their fast-growing neighbor (with whom they do substantial trade). China’s external demand helps Japan do better than they would otherwise—not to mention an overall growing world that also helps pull Japan along. Even if there are bumps along the way for Japan (as there likely will be), that shouldn’t stop the positive forces propelling the global economy forward.