The G20 summit in Brisbane, Australia, issued a statement setting the objective of increasing world growth by two percentage points over the next five years. But the release of data showing that Japan had fallen back into recession underlined the worsening state of the global economy.

Contrary to most forecasts, which predicted an annualised growth rate of over 2pc for the third quarter, preliminary figures showed a contraction at an annualised rate of 1.6pc. Coming on top of the 7.1pc fall in the second quarter, this means Japan is now officially in recession.

This is the fourth recession experienced by the world’s third largest economy since the global financial crisis of 2008-2009. Together with near-zero growth in the euro zone, it signifies that the tendencies toward stagnation and outright recession in the world economy as a whole are intensifying.

Some commentary on the shock announcement attempted to downplay its significance by pointing out that, but for a significant rundown in inventories, growth would have returned a small positive figure. In fact, the fall in inventories is indicative of mounting problems. It shows that manufacturers are wary of building up large stocks of unsold goods because they anticipate slowing consumption.

When growth contracted sharply in the second quarter, outweighing a rise in the first three months of the year, it was attributed to the increase in Japan’s consumption tax from 5pc to 8pc last April. Financial commentators hoped that the slump was a result of this one-off factor. Such hopes have now been dashed.

A breakdown of the third quarter data shows that the sales tax hike’s impact was more severe than anticipated

Yoshiki Shinke, the chief economist at Dai-ichi Life Research Institute, told Bloomberg: “April’s sale tax completely destroyed Japan’s economy — no part of Japan’s economy looks encouraging.”

A breakdown of the third quarter data shows that the sales tax hike’s impact was more severe than anticipated. Housing investment fell 24pc from the same quarter a year ago, while corporate capital investment declined almost 1pc. Consumer spending, which accounts for two thirds of the economy, rose by only 0.4pc.

The contraction has thrown a cloud over the economic programme of Prime Minister Shinzo Abe, known as Abenomics.

When he came to power two years ago, Abe pledged to lift the economy after almost two decades of stagnation. He unveiled a government stimulus package and the Bank of Japan undertook the largest programme of government bond purchases on a per capita basis of any central bank in the world, in order to try to halt the deflationary spiral.

Faced with continued downward pressure on prices, Bank of Japan governor Haruhiko Kuroda announced a further expansion of quantitative easing last month.

That decision was only implemented after a five-to-four vote on the bank’s governing council, indicating deep policy rifts within the Japanese financial and political establishment.

Those divisions are also reflected in differences over whether the proposed second leg of the consumption tax hike — a rise from 8-10 percent scheduled for October 2015—should now go ahead.

The tax increase is being demanded by those who insist that the government must rein in the growing budget deficit, which stands at 240pc of (GDP, the largest by far for any major economy.

Longer-term data indicate the government’s mounting fiscal problems. According to calculations by Bloomberg, nominal GDP, which is not adjusted for price changes, is now 7.9pc below its peak in 1997. This means that tax revenues, which are based on nominal amounts, are under continuous downward pressure. This is a key reason why the government insists that returning inflation to a level of at least 2pc is priority.

With his economic policies having suffered a major blow, Abe has called for general elections in December. As a comment piece in the Financial Times on Monday put it, however, any election would be less about Abe’s control of the parliament and more about trying to assert his dominance over his Liberal Democratic Party.

‘Fiscal hawks’ in the LDP’s tax commission, the comment noted, have demanded that Abe proceed with his commitment to lift the consumption tax rate. The LDP ‘hawks’ have support in both the finance ministry and the Bank of Japan.

The problem confronting Abe is that if he goes ahead with the tax increase, this will further depress the economy, adding to the deflationary pressures the Bank of Japan is trying to counter with its bond-purchasing programme. Consequently, he has pushed for a delay in the second leg of the tax hike to 2017.

The tax rate rise is unlikely to be totally scrapped, however, because of concerns that unless the government is at least seen to be trying to implement revenue-raising measures and halt the rise of debt, the financial system’s stability could be undermined.

Courtesy: WSWS

Published in Dawn, Economic & Business, November 24th, 2014