Member Article

What does Japan’s shock recession mean for the UK economy?

On Monday morning, the third largest economy in the world officially fell into a technical recession, following the second quarter of unexpected economic decline. The country’s GDP fell at an annualised rate of 1.6% from July to September, compared to a forecasted rise of 2.1%, following a revised 7.3% contraction in the second quarter - the biggest fall since the March 2011 earthquake and tsunami.

Earlier today, Japan’s Prime Minister Shinzo Abe called a snap election two years ahead of schedule, with plans to dissolve parliament later this week. Mr Abe, who was elected two years ago, has also promised to postpone the planned increase to sales tax.

The rise in Japan’s sales tax was brought in by the previous government in 2012 to curb the country’s immense public debt, which is the highest among developed nations. In April, the first rise from 5% to 8% came into effect. The aim of the increase was to boost government income but instead Japanese consumers seem to have stopped spending. The second planned increase, to 10%, was set for October 2015 but has now been delayed by at least 18 months.

Mr Abe’s unorthodox economic strategy was expected to set an example for Europe and the US, with tough fiscal policies and tax increases, the Japanese economy expected to overcome malaise while the central bank to injected money into the economy. “Abenomics”, as the strategy is known, has failed to reignite recovery in Japan, tipping the economy over the edge. Europe is in two minds about following Japan’s strategy by pumping more money into the economy, as while the central bank considers an equally aggressive bond-buying campaign known as quantitative easing.

Yesterday, USA Today reported that the Japanese recession is unlikely to slow US economic growth, however it does spark fears for the state of the global economy as a whole. The falling value of the yen against the dollar makes Japanese imports less expensive in the US, and is therefore a bonus for American consumers.

Yesterday David Cameron failed to quell fears, stating that “red warning lights are flashing on the dashboard of the global economy.” Writing in the Guardian at the close of the G20 summit in Brisbane, Cameron said: “The eurozone is teetering on the brink of a possible third recession, with high unemployment, falling growth and the real risk of falling prices too. Emerging market economies which were the driver of growth in the early stages of the recovery are now slowing down. Despite the progress in Bali [trade talks in 2013], global trade talks have stalled while the epidemic of Ebola, conflict in the Middle East and Russia’s illegal actions in Ukraine are all adding a dangerous backdrop of instability and uncertainty.”

Like Japan and the US, the UK relies heavily on domestic spending and, unlike the US, our deficit isn’t going anywhere. A reduction in domestic spending here would result in an increase in national debt, putting us in an equally precarious position to Japan. This, combined with Cameron’s scaremongering, will only increase widespread concern for both the UK and the global economy.

This was posted in Bdaily's Members' News section by Ellen Forster .