The Japanese Economy Is Recovering. But is it sustainable?

In the last quarter, Japan recorded its first economic expansion after six quarters of negative growth. But can we talk seriously about a sustainable recovery with the Japanese economy being boosted primarily by a series of stimulus packages engineered by the government?

Indeed, in the last quarter Japan recorded a 3.7% growth after an 11.7% decline in the first three months of 2009. However, as data shows this expansion was mostly boosted by governments across the world pumping money into their economies. In fact, the main driver of second quarter uptick was a recovery in external demand and benefits from Japan’s May stimulus package. For example, public fixed investments accelerated 36% due to extensive public works. Also, personal consumption went up 3% as subsidies for purchasing energy saving electrical goods and environmentally friendly autos boosted the sale. Looking further, the growth contribution from trade recovery was somehow significant because of weak imports more than a pickup in exports. And, although exports (still around two thirds of last year levels) declined at the slowest pace in the second quarter, it was mostly due to global stimulus measures and renewed inventory buildup.

Yet, this economic recovery has weak foundations because the fiscal stimulus measures were not enough to boost residential and business investments. In fact, business investments fell 4.3% as production levels were still not sufficient to prompt businesses to spend more on equipment and new developments. Also, residential investments dropped significantly, more than 10%, indicating that people depressed by lower wages and possibility of losing the job were reluctant to buy houses.  Looking forward, at Trading Economics we expect economic growth below trend with sluggish spending around the world expected to continue and stimulus packages sooner or later drying up.

Anna Fedec,
8/21/2009 12:47:50 PM