Japanese economy takes a turn for the worse

It is looking quite bleak for the Japanese economy.

The Japanese economy entered a recession after the economy contracted in the second and third quarters of this year by 1.0 percent and 0.5 percent respectively. A recovery is not likely to come soon.

More recent economic data show the economy probably contracted again in the fourth quarter. Industrial production fell 3.1 percent in October. The composite coincident index fell to 97.7 in October from 100.1 in September.

In fact, the deterioration in the economy may be accelerating. The composite leading index fell sharply to 85.2 in October from 89.2 in September. Exports fell 26.7 percent in November from a year earlier, leaving the export-dependent economy with a trade deficit of 223.4 billion yen.

Certainly, the Japanese government is not expecting an imminent recovery. On Friday, it released a forecast of zero growth for the economy in the year to March 2010. Its December economic report described the economy as "worsening".

The Bank of Japan has the same view. Its latest monthly report on the economy released today said that economic conditions are "deteriorating".

Policy-makers are responding to the deterioration accordingly. On Friday, the Bank of Japan cut the overnight call rate to 0.1 percent from 0.3 percent and announced that it would be buying commercial paper to help ease the credit crunch. Over the weekend, the Japanese government announced that it had prepared an extra 4.79 trillion yen budget to finance its economic stimulus package.

While these steps will be of some help, there is I think little doubt now that the Japanese economy will have to go through a considerable period of contraction.