Why Has Japan Been Hit So Hard by the Global Recession?

IMF Staff Position Notes, March 18, 2009

Source details

Canonical URL

Why Has Japan Been Hit So Hard by the Global Recession?

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Authors: Martin Sommer
• Published: March 18, 2009
• Series: IMF Staff Position Notes
• DOI: https://doi.org/10.5089/9781455282494.004

Main findings on export-led shock

• The Japanese economy has been hit hard by the slump in global demand for advanced manufacturing products such as cars, information technology, and machinery.
• These sectors "account for a larger share of production than in other G-7 economies."
• "Most of the drop in Japan’s exports was caused by a sharp retrenchment in overseas demand for motor vehicles, information technology, and capital goods."
• The collapse in demand was driven by firms and consumers cutting "investment and durable goods spending in response to the global credit crunch and extraordinary uncertainties about the outlook."

Role of domestic financial conditions

• "Worsening domestic financial conditions deepened the current recession by reducing domestic demand, especially business investment."
• Tight domestic financial conditions act as a headwind that can prolong the production adjustment beyond what would occur from external demand shocks alone.

Inventory dynamics and short-term outlook

• Inventories "have accumulated well above normal levels in both Japan and its export markets," creating an additional drag on production.
• Historical analogy: "During the 2001 recession, industrial production started recovering about 5 months after the peak of the inventory cycle."
• By analogy, "one could expect a bottom in industrial production around May 2009."
• However, because "the global environment is expected to remain weak and the Japanese economy faces headwinds from tight domestic financial conditions, the production adjustment could take longer during this recession."

Synthesis of causal factors

• External demand shock concentrated in advanced manufacturing (cars, IT, machinery) — primary driver of export collapse.
• Domestic financial deterioration — amplified the downturn by reducing business investment and domestic demand.
• Elevated inventories in Japan and export markets — necessitate a pronounced production adjustment that could delay recovery.

IMF Staff Position Note No. 2009/005 (Martin Sommer), March 18, 2009.

Content in this bundle

• Why Has Japan Been Hit So Hard by the Global Recession?
  • Why Has Japan Been Hit So Hard by the Global Recession? (Markdown version)
  • Why Has Japan Been Hit So Hard by the Global Recession? (PDF)