Japan back in recession signals need for more stimulus globally

1. John H. Makin 

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Markets were shocked by Japan’s -1.6% Q3 2014 growth pace which was reported over night. Forecast had been for +2.0% pace, so the negative rate was a big disappointment that puts Japan firmly in recession since this news follows an awful Q2 growth of -7.3%.
Stocks dropped about 3% in Tokyo and stocks worldwide are also dropping given fears of more Asia Drag. China is already weaker, and China and Japan are a huge hunk of global GDP, more than 20% together. Throw in a collapsing Russia and a passive, disinflating Europe and global growth looks set to slow.



All this said, at least Japan has already responded to this recession news with a huge extra monetary stimulus, which the Bank of Japan (BOJ) announced a few weeks ago – probably once BOJ Governor Kuroda got an early look at the weak Q3 numbers. And Prime Minister Abe will no doubt soon announce a delay of the scheduled 2015 consumption tax increase in order to cut the fiscal drag that helped pull Japan into its latest recession.
Despite the bad news, Japan, among G7 nations, is the most proactive macro policy manager. Easier monetary and fiscal policy, along with some reversals of the Q3 inventory drag on GDP, will produce a strong move out of recession for Japan in Q4 2014 and thereafter provided that China and Europe don’t slip further toward deflation.
For the Fed, forget about the “exiting zero rates” blather and let’s start talking about hitting the 2% inflation mandate. Japan’s recession just means that the burden on the rest of the G7 to avoid a global recession has grown heavier.
The new Congress could help by enacting reductions in income and payroll tax rates early next year (as I discuss in more detail in my latest AEI piece). The small US deficit alongside Japan’s reentry into recession makes easier US fiscal policy all the more important.