Japan’s Worst Ever Post-War Slump

The depth of the Japanese economic recession is quite staggering. Annualised growth of real national output is now -15% with exports and manufacturing output down by more than 25% over the last year alone. Real GDP has shrunk back to the level it was at in 2003.

This BBC article is a timely reminder of cumulative causation in a downturn.

Exports decline - manufacturing production contracts - weak orders causes a slump in supply-chain industries - corporate sector profits are hit - falling demand and rising spare capacity drives down capital investment (accelerator effect) - rising unemployment and job insecurity prompts a rise in the household savings ratio and a decline in consumer spending (paradox of thrift). - all of which serves to worsen the severity of the recession.

What can macroeconomic policy do in such such circumstances? Does monetary and fiscal policy become ineffective? Is Japan dependent on a recovery in external demand?

This Radio 4 report provides great background