Carburton Street, London -- Japan is officially in recession. The world's second biggest economy said its economy shrunk for the second successive quarter, namely the period of July to September. And by definition two consecutive quarters of falling gross domestic product (GDP) means that the Japanese economy is in recession. In fact the ailing Eastern giant has been flirting with recession for quite some time as monetary and fiscal policies failed to revive the economy.
Interest rates have been cut to as close to zero as possible in the hope that monetary stimulus would prompt consumers to start spending again. The low rates of bank borrowing have also failed to inspire firms to invest. And fiscal policy in the form of Government giveaways has not provided the impetus for Japanese shoppers to spend.
In effect, aggregate demand, or the total level of demand within the Japanese economy is unhealthily low. Aggregate demand is measure of the total amount of spending, at any one time, by consumers, companies, government and foreign importers. Clearly the policies that have been initiated by the Japanese Government has failed to stimulate the first three of those four interest groups, thus far. This then leaves the final group to be addressed -- the Japanese government.
Demand within the Japanese economy can be excited if Japanese companies are able to boost their exports. This can be achieved quickly if the cost of those goods exported is reduced sharply. Whilst it is possible for Japanese companies to reduce production costs internally, export prices reductions can be achieved far more expediently if the Japanese yen is devalued.
The impact for foreign economies in the event of a yen devaluation could be quite significant. UK companies that rely on exports to Japan could be adversely impacted. This would affect those companies that operate, say, in the luxury goods market. Retailers could also be affected but in their case the impact would most likely be positive since imported goods could be markedly cheaper.
Clearly Japan is in a mess and the Japanese government's policy has so far failed to work its magic. Devaluation is the now most likely course of action, if not the only option, for Japanese policy makers. And for UK investors forewarned is, as always, forearmed.
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