Japanese GDP contracts 3.3% q/q in 2008Q4

Or, 12.7% on an annualized basis. From Reuters:

TOKYO (Reuters) – Japan’s economy shrank 3.3 percent in the fourth quarter, the biggest drop since 1974 and further confirmation that the world’s second-biggest economy is in a severe recession as the global economic crisis deepens.


It was a bigger fall than the 3.1 percent contraction expected by economists and marked the third consecutive quarter of contraction — the first time this has happened in Japan in seven years.


Japan’s gross domestic product figure translated into an annualized fall of 12.7 percent, exceeding a consensus market forecast for a 11.7 percent contraction, government data showed.


Brad Setser presaged this announcement in his post A truly global slump. He notes “There is a lot of spare capacity in the global economy now.” I’ll observe that if one believes in a Classical world, then there is no such thing as “spare capacity”. If one believes in a New Classical world [1], there is probably no spare capacity — certainly none that can be systematically eliminated using monetary or fiscal policy. Things to think about, when considering what model is appropriate for interpreting the world.


Update – graph added 9:10pm


g3gdp.gif

Figure 1: Log US real GDP (blue), log Japanese real GDP (red), and log Euro Area 15 real GDP (green), all rescaled to 0 in 2007Q4. US NBER defined recession dates shaded gray, and dashed line at US peak. Source: BEA, 30 Jan 09 release, IMF IFS, and ECB, updated with news accounts, and author’s calculations.

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22 thoughts on “Japanese GDP contracts 3.3% q/q in 2008Q4

  1. Don

    Over capacity is really about uneven development (or, as some prefer to name it: global imbalances).
    Uneven development has to do with disparities in social wealth and the international division of labor, in which some are primarily producers and others consumers.
    The resolution is re-distribution, or more to the the point, re-structuring of domestic and the global economy, in which products produced are consumed with much greater equity. Such is the democratization of economy.

  2. all-the-T-bills-in-China

    It isn’t that complicated. Resources have been grossly misallocated to goods requiring credit: Housing, autos, capital goods, etc. This misallocation was caused by massive credit creation seeded by the central banks around the world.
    The complexity of production structures depends on the degree of saving. Interest rates communicate this where money is produced by markets rather than government fiat. In our world, central banks continually distort interest rates, thereby misleading producers. In example, when interest rates were ridiculously depressed as in the US after the Dotcom collapse, car companies rationally geared up to produce 16 million autos/annum…It is now clear that such demand was unsustainable.
    Because distorted interest rates miscommunicated the degree of savings, producers have capacity to produce the wrong types of goods.

  3. GK

    The thing about excess capacity is that the excess just doesn’t last that long.
    1) Excess capacity and inventory of autos corrects itself in 12-18 months total. Cars have a life of 10-12 years, so eventually, new purchases catch up.
    2) There are about 3 million excess homes in the US. It will take about 4 years for population growth to absorb that in (3 years for pop growth, and add 1 more year due to a lack of confidence in home prices).
    3) In electronics, I can tell you with confidence that excess inventory and capacity will only last a total of 3 quarters tops. This is the sector where it is easiest to rebalance.

  4. all-the-T-bills-in-China

    GK,
    Will that population growth be able to afford the homes as long-term interest rates assert there true market values? Once ‘quantitative easing’ translates into price inflation, the $ declines, & the Chinese decide they have enough of our debt, a secular increase in long-term interest rates will be devastating. Central banks cannot depress long rates indefinitely.
    If we had not short-circuited the Dotcom recession with massive credit creation, our situation in the US would not be nearly so dire.

  5. DickF

    Menzie wrote:
    I’ll observe that if one believes in a Classical world, then there is no such thing as “spare capacity”. If one believes in a New Classical world [1], there is probably no spare capacity — certainly none that can be systematically eliminated using monetary or fiscal policy. Things to think about, when considering what model is appropriate for interpreting the world.
    Spoken like a true Keynesian who is totally confused as to what classical economics actually is. This is exactly how Keynes justified his illogical conclusions, by creating a classical theory strawman then beating it to death.
    Classical theory does state that there is no such thing as spare capacity in a free market. But classical theory has always recognized the distorting influence of government intervention.
    Government subsidy, for example, picks winners and losers. The winners have a shortage of capacity and the losers have spare capacity.
    Government also creates “spare” capacity through monetary policy combined with tax and subsidy policy. Inflationary policies creat conditions where money does not enter the economy evenly (surprise Helicopter Ben!) and so some segments of the economy receive excess cash while others are left behind. Now because the market is not demanding goods from those companies with the excess cash they begin to over produce and over build plant and equipment. Once the excess cash has done its dirty work and the economy begins to return to normal, all this plant and equipment is suddenly idle and good Keynesians point out the spare capacity.
    Keynesians become trapped in their own ideology attempting to fix problems that they have created and blaming everyone else especially the non-existent “Free Market” that their policies destroyed long ago.

  6. JD

    I am interested in knowing the relationship between GDP growth rates and deflationary expectations. What is/how strong is the evidence of correlation between deflationary cycles and GDP growth? And, what are the causal infrences that account for this relationship. Specifically, how many quarters of negative growth before investors begin pricing deflation into consumption/savings decisions?

  7. Mike Laird

    no such thing as “spare capacity” – Hah!

    Anyone who believes there is no such thing as spare capacity has never worked in a manufacturing plant. At best, one could say some kind of balance of capacity and demand occurs at equilibrium, but this is completely academic. When does equilibrium occur in real economies? Equilibrium is too evanescent a concept to be useful in real world decision making – like when was the last one – prove it – when is the next equilibrium going to occur – willing to bet your own investment dollars on it?

    When economics deals with dynamic interacting economic forces as the normal state of affairs and the normal structure of model equations, then it will get somewhere as a science.

  8. mm

    “& the Chinese decide they have enough of our debt”
    It’s mind-boggling to me how so many people act as though China is sitting in the control seat this way.

  9. all-the-T-bills-in-China

    mm
    I’m only saying that the Chinese will see the trillion or so of our debt decline in value to ~half that value & thus decide it isn’t in their interest to buy more of a declining asset.
    They are in worse shape than we are, having misallocated resources more severely than we have. In addition to their unsterilized creation of Yuan, their state-owned banks have likely made many politically inspired loans. Their decline in GDP production will be more severe than ours: They are not in the catbird’s seat at all. Their main advantage over us is greater savings–albeit forced to some extent.

  10. DickF

    Dick F wrote: Government subsidy, for example, picks winners and losers. The winners have a shortage of capacity and the losers have spare capacity.

    Government also creates “spare” capacity through monetary policy combined with tax and subsidy policy. Inflationary policies creat conditions where money does not enter the economy evenly (surprise Helicopter Ben!) and so some segments of the economy receive excess cash while others are left behind. Now because the market is not demanding goods from those companies with the excess cash they begin to over produce and over build plant and equipment. Once the excess cash has done its dirty work and the economy begins to return to normal, all this plant and equipment is suddenly idle and good Keynesians point out the spare capacity.

    DickF:

    Can you point out some of the government subsidies that created the current housing debacle?

    PS Thanks for the shout-out. I’m guessing that was for me.

  11. Buzzcut

    A lot of this contraction has been currency related. And after testing lows in the 87 yen to the dollar range, the yen has been rising a bit. It’s currently over 92.
    The Japanese economy has been surviving on currency manipulation and the carry trade. Now that global interest rates are nearly as low as theirs, the carry trade is done. Where do the Japanese go to eek out growth in their export oriented economy?
    More exports. The Japanese don’t know any better. But getting competitive at these currency levels will take time.
    Maybe they can become consultants on the stimulus. They certainly know how to build infrastructure.

  12. Jayson Virissimo

    “Maybe they can become consultants on the stimulus. They certainly know how to build infrastructure.”
    Yeah, but if you ask most Japanese economists they will say that their stimulus was a failure and merely increased their debt with little benefit.

  13. DickF

    Ben,
    I was not directing my comments to any specific person.
    Notice that I did not directly relate my comments to housing or the credit problem, but I will answer your question. Understand that I was using the term subsidy in a generic way. A subsidy can be in the form of direct payments, this was done in the housing boom by some states but I do not know of any at the federal level, or it can be in the form of regulations that either favor one party or penalize another party. The major cause of the housing boom/bust was due to regulations rather than direct subsidy.
    Both political parties since the Great Depression have attempted to appeal to voters by forcing banks to relax lending standards. The housing market was large enough to absorb some increase in bad debts, but in 1992 with the release of a Federal Reserve Bank of Boston study that purported to prove that there was discrimination in lending, and claiming that relaxing traditional lending standards did not increase defaults. The result was a flood of lawsuits, threats from government, and bad press.
    The mortgage companies, sensitive to their market, began to create ways of hedging their losses so that they could counter the bad publicity by relaxing their lending standards. The result was loan bundling and other such creative instruments that allowed potential bad loans to be bundled with good loans to reduce the risk. Then to take advantage of the high risk loan business created by the regulatory agencies companies like Countrywide expanded. In 1992 when the Boston FED study was released Countrywide did $1 billion in low-income loans. By 1999 it had grown to $80 billion. With housing prices rising and Fannie and Freddie mandated by congress to increase their percentage of secondary low-income loans Countrywide exploded and within 4 years, 2003, they were doing $600 billion in low-income housing most of it sold to Fannie Mae in the secondary market.
    To add to the problem the FED was in the process of adding liquidity in fear of Y2K. The dot com bubble had burst so the new FED money was seeking a home. No-money-down and no income verification loans were a perfect parking spot especially since housing had been appreciating faster than any other segment in the economy. Flipping became big business because it used other peoples money.
    Everything came to a head when the Wall Street mortgage banks could no longer afford to buy the bundled paper of Fannie and Freddie. Companies like Countrywide suddenly were stuck with the bad loans they had made and home prices began to fall. Falling home prices exposed those who had over extended themselves and suddenly the dominoes began to fall.
    So the subsidies were given by government to low-income borrowers as lenders were forced to accept a higher default rate. Subsidies were then given the lenders as GSEs were forced by the government to purchase bundled paper.
    Hope this helps.

  14. DickF

    Ben,
    I did also want to add that Fannie and Freddie held 73% of Total Mortgage Originations as of the end of 2008 http://www.fhfa.gov/webfiles/216/WHF121008webversion.pdf . In a recent conference a Wells Fargo representative said it is currently 90%. I did not want to quote this until I could source the 2008 number.
    The federal government has virtually nationalized the mortgage industry and there are rapidly moving to nationalize health care, not to mention the auto industry and how many other. When we say the US is a socialist country how can anyone deny it. And how can anyone call it a free market country.

  15. DickF

    DickF and anyone else,
    Did anyone else hear the Planet Money podcast on Friday? It concerns government bailout in the home mortgage sector, the possible effects of going with the plan versus no intervention. One interesting point is that even if you are a responsible home owner with no credit problems, you are indirectly penalized by your neighbors foreclosers by a reduction in your home’s value below that of its fundamental value. In other words, responsible home owners pay in terms of their equity for their neighbors’ mistakes.
    Any thoughts on the podcast? I’d like to hear viewpoints different from my own admittedly (pinko?) liberal standpoint.
    PS dickf, thank you for the in depth read. I will have to look into it for myself some.

  16. DickF

    ben,
    :-)
    Could you give me a link for the podcast?
    Just one observation and something to think about based on your comments. A homeowner who is actually buy a place to live should be virtually unconcerned by the market price of their home. When money was stable, when we were on the gold standard, there was virtually no inflation to give a false appreciation to homes and they stayed approximately the same price. There were differences due to location or neighborhood changes, but prices remained basically unchanged all things equal.
    Your concern about home prices only comes into effect if someone expects their home to be an investment. What most do not realize when they see their home as an investment is that their gain from “appreciation” is actually a gain due to currency depreciation. The home owner’s gain could be seen as a lender’s loss, but….
    Yes, home owners can step up to a better home due to inflation, but this step up is paid for by those who lend or hold cash. Since lenders usually recover this inflationary cost by increasing either the interest rate or the selling price of the home ultimately the holders of cash, significantly the poor, pay for your new home.

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