A ‘Painful Period’ Ahead for Japan’s Battered Economy
Japan’s Gross Domestic Product (GDP) shrank at an annual rate of 12.7% in the October-December period, the Japanese government reported today. Given that Japan “is the second biggest economy, it’s bad news, not just for Japan, but also for the rest of Asia and for the global economy overall,” says Wharton finance professor Franklin Allen. By way of comparison, the GDP of the U.S. and the euro zone dropped 3.8% and 1.2%, respectively, in the same quarter, according to news reports.
“It’s not a good scenario,” says Allen. “Japan has a trade-based economy to a large extent, and that is falling dramatically.” Moreover, “the country already has enormous amounts of public debt, so it’s difficult for them to have large stimuli to bring them out. And they have a political problem as well, with the current prime minister [Taro Aso] being exceptionally unpopular.” Altogether, Allen suggests, “it’s much worse than I thought.”
Indeed, GDP was expected to contract by only 11.6%. The 12.7% drop is just slightly smaller than the 13.1% decline registered by Japan in 1974 at the height of the oil crisis.
“One aspect of this is that there are very strong companies, like Toyota (see Knowledge at Wharton article), having big problems,” Allen adds, “although on the positive side, Japan has a very coherent, cohesive society and they will get through, but it is going to be very painful.”
