According to recent reports, the Japanese economy shrank for a second consecutive quarter, signaling the start of yet another Japanese recession. The Japanese economy has been struggling for the past three decades. While it was looking like things were starting to look a lot better, the great recession hit the USA dropping Japanese exports. This accompanied by the tsunami in early 2011 has caused the decades long Japanese recovery quite the setback.
With the highest debt to GDP ratio in the world, Japan has been struggling for quite some time. During the 1980’s the country took some drastic spending measures to help get them through the tough times. While the spending helped to keep the Yen strong and the economy moving, it also plunged them into quite a bit of debt. We saw that even with a struggling economy, things remain positive for the pacific island nation, so if another recession starts, what can we expect in America?
Some of the top technology companies in the world are in Japan (think Toshiba, Panasonic, and Sony). With a contracting economy these companies will still be producing quality goods, and they will likely become cheaper to import to the US. As the value of the Yen goes down, comparatively the value of the dollar will go up. So one dollar will go a lot further to purchase goods from Japan.
While the cost of goods may go down if Japan enters another prolonged recession, the companies producing those goods will lose money. This means that for investors, the funds they have invested in international developed markets will flounder and could lose value. Even more important than an investor’s portfolio losing value, is that Japan could stop buying US Treasury bonds. With Japan withdrawing from purchasing bonds, the yield could start to rise. This would have effects that rippled throughout the US economy from mortgage rates to savings rates to company dividends.
A recession in any part of the world will have a global impact. These impacts will be even greater when those countries are highly involved with the US (like Japan and China). If Japan is entering into a recession (or a prolonged one) the impacts could cause the US recovery to slow or even stop. Fortunately, many experts are saying that 2013 should be a good year for Japan and this recession should just be a small blip on their long term recovery.