TOKYO — Japan’s economy is on course for a major downturn as demand from China ebbs, according to a survey of international economists, underscoring Tokyo’s continued failure to improve the country’s stubbornly low potential growth rate.
This is the second poor forecast for the country’s economy inside the past week. Japan’s Cabinet Office released a monthly assessment of business conditions on May 13 that described the environment as “worsening” for the first time in more than six years — and the first time since the earliest days of Abenomics, Prime Minister Shinzo Abe’s signature economic policy.
The Munich-based Ifo Institute’s most recent quarterly World Economic Survey backs up this pessimistic view. The German organization surveys about 1,300 economists from around the world, then uses their responses to calculate indexes of current and expected conditions for national and regional economies. Positive consensus equates to a score of 100, with a 50-50 split resulting in a score of zero.
The results are plotted onto a “business cycle clock” chart that starts with a recession quadrant in the lower left corner and proceeds clockwise through upswing, boom and downswing. In this analysis, “recession” does not necessarily equate to the technical meaning of economic contraction.
For the current quarter, Japan’s economic climate index fell to minus 10.7 from plus 6.9 in the previous survey, while the expectations index worsened to minus 42.9 from minus 41.4. This put Japan in the recession section of the clock for the first time since July-September 2016.
The two Ifo indicators dropped below minus 10 together on four occasions in the 20 years before the launch of Abenomics. The economy proceeded to deteriorate in each case, bottoming out about a year later on average.
By contrast, Ifo’s assessments of other economies improved for this quarter. The U.S. and Europe saw smaller negative readings in their expectations indexes, while China moved sharply toward the upturn quadrant. As the slowdown of China’s economy reverberated around the world, the monetary policies of the U.S. and Europe have taken a dovish turn. Meanwhile, China has introduced massive economic stimulus measures.
The divergence owes to a few factors. Japan — being geographically and economically closer to China than most — has been hit particularly hard by the downturn. Furthermore, Japan’s monetary policy is already very loose, making further easing difficult. The looming consumption tax hike in October also weighs on sentiment.
But a deeper issue than either of these is potential growth. This represents the underlying strength of an economy after looking beyond temporary fluctuations, and is affected by such factors as population trends and technological innovation.
The U.S. and Germany are believed to have potential growth rates of nearly 2% a year, while the Cabinet Office estimates Japan’s at about 1%. This means that the Japanese economy is more vulnerable if external demand dries up.
Should China’s stimulus take hold, concerns about a worsening Japanese economy may be washed away. Yet Japan is constrained not only in its monetary policy, but also in its fiscal leeway considering the heavy government debt load. The government faces the task of revitalizing the economy at a deeper level, including such measures as easing employment-related regulations and undertaking social security reforms.