Japan’s in recession again—but maybe this time will be different

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Japan’s economy fell into technical recession this year, after it’s GDP fell in two consecutive quarters. The data don’t look pretty: GDP contracted a full 3.5% in the second and third quarters of the year. It’s the fifth recession in 15 years, and many analysts expect it to continue into the fourth quarter.

Real GDP is now 2.3% below its level in 2008. Nominal GDP is 7.4% below its level at that time.
Real GDP is now 2.3% below its level in 2008. Nominal GDP is 7.4% below its level at that time.
Image: Lombard Street Research

However, Nomura economists believe that the downturn this year could be a sign of good things to come next year. These expectations are based on three assumptions.

First, opposition leader Shinzo Abe is leading by a significant margin (paywall) ahead of parliamentary elections next week. Abe has been a vocal supporter of unlimited monetary easing and fiscal stimulus, and Nomura (among other investment bank and research firms) expects that the Japanese central bank will take action to ease policy further early next year.

These easing and stimulus policies will make goods even cheaper. As the chart above shows, Japan has experienced significant deflation since the financial crisis. That means its exports are cheaper than they were a few years ago. So, should China and the US begin to recover, optimists expect they will increasingly buy Japanese goods.

In their 2013 outlook, Nomura analysts led by Tomo Kinoshita write:

We expect the export recovery in Japan to stimulate private investment and also domestic demand, allowing overall growth to return to positive territory from Q1 onwards. By mid-2013, Japan’s export growth is likely to gain further strength as we expect growth in the US to pick up in H2 2013. This recovery process should also be supported by yen depreciation against the US dollar to 88 JPY/USD at end-2013.

These assumptions might not materialize, but if they do, China and the US could help put the wind back in Japanese sails, and pull it out of economic doldrums that it has spent years trying to escape.