Japan Slips into Recession

Context:

Japan unexpectedly slipped into a recession at the end of last year thus, losing its title as the world’s third-biggest economy to Germany.

As per the Government’s data, Japan’s gross domestic product (GDP) fell an annualised 0.4% in the October-December period after a 3.3% slump in the previous quarter

Relevance:

GS Paper 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Dimensions of the Article:

1. Concept of Business cycle
2. What is Recession?
3. Causes of a Recession

Concept of Business cycle

• For the Quality of Life to improve, a conscious public policy which spends in areas like food, nutrition, health, education, shelter, social security, etc is required. But for such expenditures and investments, the economy needs equitable level of income, too!  
• The income enhancement and development is dependent on growth prospects I.e real GNP. The govts try to maintain high levels of economic activity but economies fluctuate between best(boom) and worst(depression). 
• They are referred to as different phases of the economic activities. In between boom and depression, there might be many other situations of the economic activities, such as—stagnation, slowdown, recession and recovery.  
• The fluctuations in the level of economic activity between the depressions and booms has been called by the economists as business cycle or trade cycle with recession and recovery as the main intermediate stages. Stagnation and slowdown may be considered as other intermediate stages of the business cycle.  

What is Recession?

• The term “recession” refers to a period of economic decline in a country.
• It is a transitory period in which we will see a decline in trade, industrial activity, employment, and so on. In general, when a country’s GDP (gross domestic product) falls for at least two consecutive financial quarters, we can call this a recession in the economy.
• As a result, during a recession, the entire country’s economic performance stagnates.
• Businesses across the country will suffer the effects of the recession. To some extent, the government will be helpless as well.
• Consider the global recession of 2007-2008. It began with the housing market collapse in the United States, but the global economy suffered as well, with negative consequences seen in India.

Causes of a Recession

1. High Bank Rates: When interest rates are extremely high, there is little liquidity in the market. As a result, investment will fall, resulting in an economic slowdown. We saw this in the United States in 1980, when interest rates were raised to combat stagflation. However, this resulted in a recession.
2. Stock Market: During a bear market, investors will withdraw funds from the stock market. This will drain capital from businesses, causing an economic slowdown. Stock market crashes are extremely damaging to the economy.
3. Housing Crisis: When house prices fall, owners begin to lose equity. They are unable to pay their mortgages or obtain second mortgages on their properties. This could result in a foreclosure. This was the root cause of the 2007 Great Recession.
4. Economic Scandals and Frauds: In order to increase profits, banks, large corporations, and even government institutions may engage in questionable practises and illegal activities. The entire economy suffers when such schemes and scandals are exposed. Consider the current Sahara financial scandal.
5. War Effects: Following a war, there is usually an economic slowdown. It is the general aftereffect of the economic stress caused by war.
6. Deflation: The inverse of inflation is deflation. In this case, we will see a general decrease in commodity and service prices. This encourages consumers to wait for further price reductions. This has the potential to cause an economic downturn.
7. Falling Wages: When workers’ wages and salaries do not rise at the same rate as the economy’s inflation, the public’s purchasing power falls. He will be unable to afford the same goods and services that he previously could. This has the potential to cause an economic slowdown.

-Source: The Indian Express