Is Japan’s Recovery Faltering?

By: Dr. Mike Campbell

With the Japanese Yen stubbornly defying the economic laws of gravity and a PM cautioning that the world’s second largest economy could tank if the international financial community were to lose confidence in the face of the nation’s huge debt, recent figures for Japanese exports are being studied with unusual scrutiny.

The figures reveal growth in Japanese exports, but the rate of growth is falling. The figures show a healthy 27.7% increase in exports last month, worth $67 billion, but the rate of increase is slowing. This is leading to fears in some quarters that Japan could slide back into recession. The Q1 2010 GDP figure was 2.1% but this had slowed to 1.5% in Q2. The value of the Yen has risen against all the other major currencies, for instance, it started the year above 93 Yen to the Dollar, but by yesterday it was just below the 87 Yen mark, a fall of 6.5% and substantially below the 105 Yen level that the Japanese government indicated it would like to see. A higher exchange rate will put pressure on Japanese exports and is expected to result in a lower GDP reading for Q3. Another factor believed to play a role is a reduction in foreign government spending as austerity measures designed to reign in public sector debt start to bites. Japan, too, will need to make some difficult decisions to rein in its own debt problems. Some analysts suggest that the strength in the Yen is due to the perceptions about the economic outlook in the US, but I would argue that the position in Japan is just as precarious. Japan is still suffering from deflation, high unemployment and low consumer confidence – but at least its balance of trade is in the black.