Gross domestic product — The economy has been in recession (as measured by quarter over quarter gross domestic product) for the most part, from the second quarter of 2008 to the third quarter of 2012. Within that period, recoveries have been brief only to contract again.

 

 

The Japanese economy dropped at an alarming rate for four quarters through the first quarter of 2009 as exports plunged and global trade dried up along with consumer spending. However, the economy rebounded in the second quarter as exports steadied and industrial production managed to rise. The economy grew for the first three quarters of 2010. However, in the fourth quarter, the economy paused. The reason for the decline was attributed to the end of government stimulus packages which had pushed purchases into the third quarter.

 

First quarter 2011 saw GDP drop 1.8 percent but was up 0.1 percent on the year. This put Japan back into recession. The decline was attributed to the vast production and supply line disruptions from the earthquake and tsunami. With enormous power problems affecting operations, companies struggled to maintain rebuilding schedules. The region that was hit by the Great East Japan Earthquake accounted for about 8 percent of Japan's total GDP. The struggle continued in the third quarter of 2011. A short-lived rebound took place with GDP gaining 2.6 percent on the quarter. However, the recovery did not last. GDP slumped once again in the fourth quarter as floods in Thailand once again disrupted Japanese supply lines and added to difficulties in the recovery effort.

 

In 2012, GDP was positive for the first quarter but contracted in the second and third. It was positive in the fourth quarter. In 2013, GDP was positive for all four quarters but weakened as the year progressed. First quarter 2014 GDP expanded a revised 1.6 percent on the quarter and 2.8 percent from the same quarter a year ago. The first quarter jump was attributable in part to businesses and consumers buying in advance of the sales tax increase from 5 percent to 8 percent that took effect on April 1.

 

However, second quarter 2014 GDP plunged as the sales tax took effect. GDP slid 1.7 percent on the quarter and was unchanged from a year ago. On an annualized basis GDP plunged 6.7 percent. Expectations for a bounce back in the third quarter were dashed when the economy retreated 0.6 percent (or an annualized rate of 2.3 percent) and was down 1.3 percent from the same quarter a year ago. The economy had declined into a technical recession, having declined two quarters consecutively as measured by GDP.

 

A rebound came in the fourth quarter, albeit not as strong has analysts expected. The second estimate of GDP was revised down to an increase of 0.4 percent from the original 0.6 percent gain on the quarter. The annualized pace of 2.2 percent was revised down to 1.5 percent. However, when compared with the same quarter a year ago, GDP was down 0.7 percent. For the year 2014, GDP was unchanged after increasing 1.6 percent in 2013. The quarterly increase was the first since the first quarter of 2014 before the sales tax increase was imposed. Consumption, which accounts for 55 percent of GDP, was up a modest 0.3 percent on the quarter while capital spending disappointed, edging down 0.1 percent.

 

The economy grew at a revised 1.0 percent or at an annualized pace of 3.9 percent according to the second estimate of GDP. However, when compared with the same quarter a year ago, GDP was down 1.0 percent. Among the components, CAPEX was revised to 2.7 percent on the quarter from the preliminary 0.4 percent. However, household consumption was unrevised at only 0.4 percent. With 60 percent of the Japanese economy consumer driven, this indicates that the sector is slow in recovering from the increased sales tax. Government consumption was down 1.5 percent and subtracted from growth.

 

Industrial production — Industrial production is considered one of the most important indicators for Japan given its reliance on exports for growth. Output had already been sagging prior to the March 11^, 2011 disaster. Auto sector output was severely disrupted along with other major sectors. The use of rolling blackouts to conserve energy upset production schedules. Production rebounded sharply following the earthquake as companies especially in the auto sector worked feverishly to repair supply line disruptions. These disruptions not only had a national impact but a global one as well. The floods in Thailand disrupted supply lines once again but output, recovered in December and January after sinking in November. Output was crimped by the slowdown in global growth and especially in China during 2012. However, output managed to increase in five of twelve months. Output declined in four of 12 months in 2013. It retreated in January, June, August and November.

 

 

Production failed to gain traction or any consistency since the sales tax increase in April 2014. In 2014, output increased in six of 12 months when compared with the previous year. In 2015, output continued to be volatile — it increased on the month in January and April and declined in February and March. Output grew in April and sank once again in May. On the year, output has been negative for 10 of 11 months.

 

Consumer spending — Consumer spending, which accounts for about 60 percent of GDP, has been the Japanese economy's Achilles heel and was an obvious drag on growth. The consumer was reluctant to spend and has certainly cut back on worries about unemployment. Besides retail sales data, an important measure of consumption is household spending. After hitting lows in January 2009, both retail sales and household spending gradually improved thanks to government stimulus packages. However, both were showing signs of weakening as the impact of the stimulus wore off before the March 11^th earthquake and tsunami disaster. Spending plunged in the immediate aftermath of the earthquake throughout Japan and not just in the immediately affected areas. Spending was volatile in 2012 and was weak at year's end.

 

 

The volatility continued into 2013 along with tepid spending growth. Purchases at the end of 2013 (and into the first quarter of 2014) were stimulated by an impending sales tax increase from 5 percent to 8 percent on April 1, 2014. In February, retail sales jumped 3.6 percent on the year and continued to show buying prior to the introduction of the sales tax increase. However, household spending dropped 2.5 percent from a year ago. In March, as consumers rushed to buy prior to April first, retail sales soared 11 percent while household spending jumped 7.2 percent.

 

Spending on both measures contracted in April, May and June. In July and August, household spending continued to decline 5.9 percent and 4.7 percent respectively while retail sales were up 0.6 percent and 1.2 percent. In September, household spending dropped 5.6 percent while retail sales were up 2.3 percent on the year. Household spending continued to show a lack of recovery from the increase in the sales tax. The same pattern prevailed in October and November — retail sales advanced while household spending declined. Retail spending was up 1.4 percent and 0.4 percent in the two months while household spending declined 4.0 percent and 2.5 percent. In December, retail sales edged up a lackluster 0.2 percent on the year. Household spending however, continued to decline. Down for a ninth month, spending lost 3.4 percent on the year this time.

 

Both measures declined in the first three months of 2015, indicating the struggle consumers are having in trying to recover from last year's recession. Household spending continued to decline as it has for every month since the sales tax increase when into effect. Retail sales were down in January, February and March after increasing from July to December 2014. Retail sales were positive for the first time in April since December 2014 while household spending was down for a thirteenth month. In May, household spending was up for the first time since March 2014. Retail sales were up for a second month in May.

 

Deflation or Inflation — After edging up after the March 2011 earthquake, the annual change in the CPI continued to hover below zero. Consumer prices were boosted after the earthquake and tsunami by energy prices. Japan shut its nuclear generating facilities and shifted to other sources of fuel which had to be imported and in turn increased the overall CPI.

 

 

The Bank of Japan and the Abe government hope to achieve their 2 percent inflation target within two years. The increase seen in the months prior to April mostly reflects increases in energy costs thanks to the weaker yen.

 

The jump in the CPI in the graph above reflects the increase in the sales tax from 5 percent to 8 percent that took effect on April 1. Core inflation excluding the sales tax was estimated to be about 1.5 percent in April. In May, core CPI excluding fresh food was up 3.4 percent from a year ago. Excluding the sales tax, the CPI was estimated to increase 1.4 percent — around the same rate of increase as before the tax was increased. After peaking in May, the rate of core inflation has declined in each month with the latest in August at 3.1 percent. Excluding the sales tax, inflation was down to 1.1 percent on the year.

 

Consumer inflation continued to ease in September, pointing to continued problems for the Bank of Japan in their efforts to raise inflation to its 2 percent target. The data are skewed by the sales tax increase in April. September consumer price index excluding fresh food was unchanged on the month and up 3.0 percent from a year ago. The 3.0 percent increase was the 16th straight annual gain but it was the lowest since 1.3 percent in March just before the sales tax increase took effect on April first. Excluding the effects of the tax increase, core was up 1.0 percent, down from 1.1 percent the month before.

 

The increase in the CPI continued to decline in October and November. The CPI was down 0.4 percent on the month in November and was up 2.4 percent on the year. Core CPI excluding fresh food was down 0.2 percent and up 2.7 percent. Since increasing 3.4 percent on the year in both May and June, the annual increase of core has steadily deteriorated. Excluding the sales tax increase, the CPI was up only 0.7 percent, significantly less than the 1.3 percent increase recorded in pre-tax increase March.

 

In December the consumer price index was up just 0.1 percent and 2.4 percent from a year ago. Excluding fresh food, the CPI was down 0.2 percent and up 2.5 percent from December 2013. Excluding food and energy, the CPI was unchanged on the month and up 2.1 percent on the year. Stripped of an impact from April's increase in the sales tax from 5 percent to 8 percent, core prices were up just 0.5 percent — the most sluggish pace since June 2013 and well below the Bank of Japan's 2 percent target for the coming fiscal year.

 

Consumer prices continued to weaken in 2015 as lower energy prices weighed on the index along with weak consumer demand. In May, consumer prices were up 0.3 percent on the month and 0.5 percent from a year ago. Excluding fresh food, the CPI inched up 0.2 percent and added 0.1 percent on the year. Among the components of the national index, energy costs dropped 6.0 percent on the year after sliding 3.4 percent in April. TVs inched down 0.1 percent after dropping 3.4 percent. Electronics goods prices also dropped less in May – down 1.7 percent after 3.5 percent.

 

Another view of deflation emerges if one looks at the producer price index. The name was changed from corporate goods price index beginning with its release in July. The PPI had been positive from 2004 to the end of 2008 when compared with the previous year. However, the price increases here did not affect consumer prices because demand was too weak to pass them on. After going through a negative stretch, the annual PPI increased thanks mainly to energy prices. However, the annual change in the PPI was negative for 12 consecutive months before registering no change in April 2013. It was up 0.5 percent in May and 1.2 percent in June. The PPI jumped 2.3 percent on the year in July, thanks to the weakening yen which makes imports more expensive. The PPI was up 2.4 percent on the year in January, 1.8 percent in February and 1.7 percent in March. Reflecting the increase in the sales tax, the April PPI was up 4.1 percent on the year. In was up 4.4 percent in May and climbed to 4.6 percent in June. The PPI eased in both July and August to increases of 4.3 percent and 3.9 percent respectively.

 

 

In September, the PPI was unchanged on the month and up 3.6 percent on the year. The PPI declined 0.8 percent on the month and was up 2.9 percent from a year ago. When adjusted for the sales tax increase, the PPI inched up 0.1 percent on the year showing troubling signs in elevating prices.

 

As with the CPI, price increases here also are easing. In November, the PPI was up 2.7 percent on the year after increasing 2.9 percent in October. In December, the PPI dropped 1.3 percent on the month and was up 0.3 percent from a year ago.

 

Producer prices continued to weaken in January and February 2015. The January PPI dropped 1.3 percent on the month and edged up only 0.3 percent from the same month a year ago. Since June, the annual rate of increase has declined with the pace of the weakening picking up speed in the last few months. Excluding the impact of the sales tax, the January PPI dropped 2.5 percent on the year after declining 1.0 percent in December. The PPI continued to sag with the annual change back in negative numbers. In June, the PPI dropped 2.4 percent from a year ago.

 

Unemployment — The unemployment rate reflected the dire state of the Japanese economy when it jumped to 5.7 percent in July 2009 after hovering around 4 percent at the end of 2008 and beginning of 2009. The last time the unemployment rate had been above 5 percent was in November 2003. The rate has gradually declined. However, the rate is more a reflection of the declining labor force than an improvement in employment. The data for March, 2011 excluded the three earthquake hit prefectures (Iwate, Miyagi and Fukushima). Since then, Japan has had a problem with these data since the earthquake, especially after adding back the three earthquake-hit prefectures. In 2012 and into 2013, the unemployment rate has remained around the 4.0 percent level. In 2014, the unemployment rate averaged 3.6 percent. Since the beginning of 2015, has declined — in both April and May the unemployment rate was 3.3 percent.

 

 

Merchandise trade imports and exports — Japan is not particularly open to foreign trade. As a percentage of GDP, the value of Japan's 2001 two way foreign trade was just 16.8 percent while in Germany, for example, was 57 percent. The closed nature of Japan's economy is also apparent in comparisons with other countries in Asia such as China, which saw foreign trade reach 42.4 percent of GDP. This is largely owing to official and unofficial restrictions on merchandise imports. These remain in place despite pressure from the United States and other trading partners in order to protect less efficient sectors of the economy. This lack of openness to foreign trade has often been cited as one of the reasons for the persistence of the structural problems in the country's economy in general and the poor productivity of companies in the non-tradable sectors in particular.

 

 

The precipitous decline in exports is one of the reasons that the economy contracted so violently in the fourth quarter of 2008, in the first quarter of 2009 and in 2012. The drop was particularly painful given the economy's reliance on exports as a source of growth. The cutback in exports fed through to the heavy declines seen in industrial production.

 

Exports were hit by the recession in Europe and the slowdown in China and elsewhere. They were beginning to show some signs of recovery. However the data in 2014 were disappointing. The lower yen has boosted imports because they are more expensive. Energy has been a major factor in boosting the size of the deficit since the March, 2011 earthquake and tsunami and Japan stopped using its nuclear power plants to provide the country's energy needs. Exports weakness continues to weigh on the trade balance while imports falter on weak domestic demand.