Sunday, February 15, 2009

The Lost Decade Revisited?

If you thought the recession in the U.S. or Europe is bad, then Japan's dire economic state makes the United States' economy look healthy and robust in comparison.

The Economist reports that figures due to be released in a few hours in Japan are expected to show that the economy has shrunk by 10% year-on-year in the fourth quarter of 2008. Such a contraction can only be compared to those of Iceland and Latvia, putting Japan in the infamous group of countries whose governments have already been ousted from power (the former) or are in the process of becoming precisely such a casualty (the latter).

Having just quite recently emerged from "The Lost Decade," when the economy contracted steeply after its asset bubble burst only to fall into a protracted bout of deflation, Japan's growth has now been stifled by the global economic crisis.

Unfortunately for Japan, this may prove to be its hardest battle yet. For one, the country’s banking system is modern and developed, so it would be hard (i.e. impossible) for Japan to decouple from such a worldwide financial debacle. Even harder, alas, for a country that is a global financial hub, the world's second biggest economy, and one of the world's largest exporters. The latter problem has been exacerbated as the yen has appreciated roughly 25% against the U.S. dollar, 40% against the euro, and some 90% against the British pound in the last six months, thus making Japan’s exports more expensive for its main cash-deprived consumers.

Such an export-oriented economy is bound to suffer greatly, especially when global demand for its products, many of them high-quality cars, electronics, and sundry gadgets, plunges.

And it seems that, as a result, Japan’s Prime Minister, Taro Aso, is likely to follow his (former) Icelandic counterpart in resigning quite soon, possibly in the next few weeks, thus becoming the next PM to resign as a result of the global financial disaster.
Expect many more to follow him.

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