Weekly Economic Commentary

Japan Check-In: Will the Weak Q3 GDP
Reading Draw a Policy Response?

Japan reported a 1.6% annualized decline in real gross domestic product (GDP) in the third quarter of 2014 over the weekend of November 14 – 16, 2014. Policymakers in Japanese Prime Minister Shinzo Abe’s government and at the Bank of Japan (BOJ), as well as most market participants, expected a solid gain in GDP in Q3, not a decline. The consensus of economists polled by Bloomberg News was looking for a 2.2% gain in GDP in Q3, after the Japanese economy contracted more than 7% in Q2 2014 in response to a big value-added tax (VAT) increase imposed in April 2014. (We’ll discuss the VAT in more detail below.) As a result of the unexpected decline in GDP in Q3 [Figure 1], Japan’s economy has met the unofficial definition of recession (i.e., two consecutive quarters of negative GDP) and has entered its fourth recession since 2007. How long Japan’s economy remains in recession — and more importantly, the policy response to the latest recession — may help to determine the trajectory of global growth in 2015 and beyond.

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Japans Economy has entered its Fourth Recession since 2007 and awaits a Policy Response

The Consumer Disappoints

Consumer spending, which accounts for 60% of Japan’s economy, rose just 1.5% in the third quarter, after the VAT increase led to a 19% drop in consumer spending in the second quarter of 2014. Most market participants — and probably the BOJ and the Abe administration — expected…

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