What are the consequences of Japan's recession?

It's official: Japan is in the midst of a recession. For the second time in just two short years, the nation has fallen into economic trouble. How did this happen? And is it likely to have any wide-reaching effects across the rest of the globe? As with most recessions, the answer to the latter is likely to be 'yes'.

The news of the sudden financial crisis in Japan took many by surprise, including the country's own experts. Most predicted that the Japanese economy would grow; the standard forecast was that it was set for annualised growth of two per cent. In actual fact, it is shrinking by 1.6 per cent over the year, or 0.4 per cent in the third quarter of 2014.

These figures were only released on Monday (November 17th), taking industry analysts completely by surprise. According to some accounts, the most pessimistic predictions for Japan estimated the economy would grow by 0.8 per cent. Nobody expected the recession to occur.

 

Why did the recession happen?

Despite the fact that the sudden shrinking of the economy came as a surprise to the majority of analysts, a good theory has already been formulated as to why exactly Japan's finances took such a hit in the third quarter of 2014.

The finger of blame is firstly being pointed at Japanese prime minister Shinzo Abe's economic stimulus package. Mr Abe's many reforms were not in themselves a bad thing. However, it seems they have not been backed up by much-needed changes in areas such as deregulation and trade, so they have not had the desired effect.

Secondly, the Japanese government has turned slightly away from this policy of stimulus, which may have been a catastrophic idea. A recent increase in sales tax is taking most of the blame for the recession, as it is thought to have discouraged consumers from spending. This caused the economy to shrink.

Finally, all of these economic problems have been exacerbated by the fact Japan is an aging country. The population of older people, many of whom have retired, outnumbers the young significantly. This means more money is being paid out of the government's coffers in pensions, while less is going back in as tax, making Japan's economic problems worse.

 

What effects could this have?

Any economy as large and as well-connected as Japan's is going to cause problems if it crashes. However, in this area much less is known. Many people can only speculate as to what exactly the future holds for global finances.

One issue is that Japan was one of the few global economies that was seeing any serious growth. With that now gone, the world will now have to turn to a different economic power to provide support in case of further recessions. It looks like that country will be the US.

Jacob Funk Kirkegaard, an economist at the Peterson Institute for International Economics in Washington, told the New York Times: "The United States is about the only growth beacon in the global economy right now, and that is not a very nice place to be.

"An American growth pickup is positive, but it looks like the rest of the world is again going to be relying on the US as a consumer of last resort."

However, the US economy may be poised to take a hit as a result of Japan's economic woes. Japanese consumers buy a large number of products from top US brands, but are much less likely to do so in the middle of a recession. As Japanese spending power decreases, the US economy could end up shrinking.

The same effect could be seen across the globe. However, for European economies the problem the Japanese recession has caused is one of uncertainty. Governments across the continent were poised and ready to follow Japan's example as a method of encouraging economic growth. However, that plan hasn't worked.

The key thing now will be to uncover exactly what went wrong and learn from Mr Abe's mistakes. However, European economies could be in for a rough ride if subsequent financial experiments yield similar results to Japan's.

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