Deutsche economist in Japan calling DEPRESSION.
Heading for uncharted territory
Unfortunately, we have become further convinced that the ongoing downturn will likely drive the Japanese economy to the most severe depression in the post WWII era, in terms of both depth and duration. It is neither a downturn nor recession anymore, but a severe depression. The DBCLI-ECONOMY, our leading index of the business cycle, has fallen by 24% since the peak and its pace is accelerating, which suggests that economic activity throughout 2009 will continue to deteriorate at a rapid pace. So far the deterioration has been mainly concentrated in manufacturing activity, such as industrial production and exports, but we believe this will spread to non-manufacturing sectors as well, in the forms of deterioration in the labor market and postponing capital investment. We tentatively suspect that he levels of real GDP and real final demand (=GDP minus inventories) will stop falling in 2Q and 3Q 2010 respectively (ie, the QoQ growth is expected to turn flat in those quarters), and that economic recovery at an annualized 1% or higher will be delayed into 2011. Our real GDP growth now stands at -2.3% in FY 2008 (ending March 2009), -6.0% in FY 2009, and -0.9% in FY 2010 (or, -0.4% in calendar 2008, -6.6% in 2009, and -2.0% in 2010).
The following factors are likely to contribute to the severity of the depression, although some of them are already familiar to many people.
1) Severe overseas recession,
2) Capital stock adjustments,
3) Backward-looking monetary policy stance in Japan,
4) JPY appreciation,
5) Downward revision of medium-term expected economic growth,
6) Downward rigidity of wages (higher employment adjustment forces)
7) Negative financial accelerators (through substantial falls in corporate cash flow and tighter lending standards of financial institutions).
Third-round shocks still large enough
Among those, #1 was a pure first-round shock to the Japanese economy. However, Japan's dependence on exports as a source of economic growth, the high income elasticity of exports, and the lack of substantial monetary accommodation relative to other central banks combined together to form a large second-round shock described in items #2 to #4 above. We regrettably forecast this chain is strong enough to result in the third-round shock shown as items #5 to #7 throughout 2009. We should not ignore the tendency that misfortune never comes alone, ie, bad events tend to follow each other in a self-fulfilling way in recessions (the opposite is true in economic recoveries).