Earlier this week economists reported that the world’s third largest economy was drifting dangerously close to the precipice of recession.
Until this juncture Japan has managed its debt through consistently running a large current account surplus. Unlike the majority of other deeply indebted nations, it is mainly the country’s population that have provided financial aid. The public pension system coupled with deposits made at government-run postal services means that, in principle, Japans biggest debt is owed to itself.
On Monday Japan posted economic data which indicated that the third quarter of the year would see a contraction in GDP growth. One of the country’s leading indicators of capital formation, core machinery orders, dropped in May to the lowest level in two years. With the yen rising and the ripple effect of the euro crisis continuing to spread exports are struggling, knocking the country’s trade balance off kilter. The weak data released by Japan this week follows April’s 11 billion yen trade shortfall with the EU.
With an escalating 14 trillion dollar debt Tokyo is facing intense pressure.
To the surprise of analysts it has now emerged that the global central bank trend of rejecting supplementary financial stimulus is one which won’t be adopted by The Bank of Japan.
Despite the fact that Japan appears to be a country ripe for easing, the Japanese Central Bank has rejected this increasingly common solution. They have disclosed hopes that greater spending, due to a heightened period of post-tsunami reconstruction, will significantly enhance the flagging domestic economy. Bank of Japan Governor Masaaki Shirakawa explained that; ‘The balance of domestic and external demand has shifted. Yes, external demand is weaker, but domestic demand is picking up the slack’. However, consumer and corporate spending remains limited and the Japanese banking system has yet to recover from the credit bubble burst of 20 years ago. On top of this, the full ramifications of last year’s tsunami disaster have yet to be felt.
Shirakawa went as far as to assert his belief that the Japanese economy would outperform the U.S. and Canada this year, by growing by 2.2 percent compared to their predicted 2 percent. With analysts all but dismissing this latest development in Japan only time will tell if these expectations bear fruit.