Japan’s economy in free fall: What does this mean for NZ?

Japan’s economy contracted by 3.3% over the December quarter – a massive fall. To put this in context, the New Zealand economy has shrunk by 1% over the past nine months (to September) on the back of a drought induced recession.

On the face of it this seems scary – Japan’s economy is falling because exports are falling, implying that “world demand” is falling.

However, then I stop and think about it. Japan produces manufactured goods – these are the things that we import. A collapse in world demand for manufactured goods will lead to lower manufactured good prices – which is an effective income boost for NZ.

Furthermore, a weak Japanese economy makes NZ seem “relatively” less risky – something that could help prevent our ability to borrow from overseas from deteriorating.

This isn’t all bad news for NZ – it is possible that global “rebalancing” could work in our favour yet …

Update:  Paul Walker rightly points out that Japan is a major purchaser of NZ products – implying that a slowdown in Japanese growth will hurt us.  This is true.  However, my view is that what matters is the “relative price” for what we sell vs what we buy.  We are a small country, so what we produce can be sold anywhere – what matters is the return.  With global demand slowing it could be the case that the price of manufactured goods falls further than the price of soft commodities – something that would actually provide an income boost for little old NZ.

  • But Matt, on the other hand, Japan also imports from us, so a sick Japan could mean a reduction in our exports.

  • “But Matt, on the other hand, Japan also imports from us, so a sick Japan could mean a reduction in our exports.”

    Very much. They are our third biggest trading partner (accounting for 8.4% of our 2008 trade) and they are a major trading partner to Aussie, China and the US (who are the other top three);

    Originally I was going to write this in the post – but I sort of moved away from it. We have to keep in mind that New Zealand sells soft commodities – if demand for soft commodities is incredibly income inelastic (relative to manufactured goods) then it is possible that New Zealand could fare relatively well in this crisis.

    I think the idea that a global recession would “lower the cost of manufactured goods” in the short term is underplayed …