Japan JUST Entered a Recession And It’s Quickly Spreading Worldwide

Japan JUST Entered a Recession And It’s Quickly Spreading Worldwide

And like that, Japan is right back in recession again. The government did report a negative quarter of GDP in the first quarter, and all signs point to the same, if not worse, in the second quarter. The only real difference over the last year has been the Bank of Japan trying to sell a narrative about a strong economy that never really existed. If GDP does fi finally crash again in the second quarter like it did in the first, what that will mean is over the last eight quarters, Japan will have experienced five negative ones across those two years. Only three positive quarters out of two years. That’s the very definition of a recession. Maybe it isn’t all at once. Maybe it’s back and forth. Maybe it doesn’t look like what people think of a recession. But Japan is now back to being a perfect example of this forgot how to grow style of economy we’ve been stuck with over the last several years. And Japan, as I’ve been pointing out, has been the one example, one possible example of a country that seemed to be escaping the grip of this constant recessionary dynamic that we’ve been stuck with all this time since the pandemic. But like all the rest of these recoveries that we’ve heard about along the way, Japan is proving to be the same false dawn no matter what. And therein lies not just a not just a warning about what’s happening in Japan, but also a warning to the rest of the world. If Japan, which was supposed to be inflationary, heading in the right direction, finds itself in the same mess that the rest of us are in, what does that say about the entire global dynamic? And we’re reminded of this in the United States here again to find to finish out the week with another drop in consumer spending which points to the same thing that the Japanese are going through when you look at their GDP numbers. Consumer confidence that was supposed to increase because of trade deals and the stock market rising. Instead, consumer confidence decreased even more as Americans say the same thing that they have over the last several months. They are deathly afraid they’re going to lose their jobs. And so that’s what the entire world is coming to. That’s what the Japanese GDP story says that the threat to the labor market continues to rise, not diminish. So Steve, Mr. Van Meter, Japanese GDP, they were supposed to be escaping recession. They’re supposed to be robust inflationary recovery. That’s why the Bank of Japan was raising rates. Suddenly they’re right back to where they were. Yeah, Jeeoff, it’s really interesting because they did seem to be escaping this when no one else was. And everyone was looking Japan. It’s like, “Wow, all of a sudden you’re seeing inflation. You’re seeing wage growth. You’re seeing demand pick up.” And you’re right, this Bank of Japan responded with, “Well, we got to raise rates.” And then everyone’s like, “Oh man, this is going to blow up the JGB market. Everyone was panicking about that.” And yet what’s really interesting to me is, you know, we have all of this front running of the tariffs. And from my perspective, it should have led to a ton of global demand. I really expected a lot more. And here we continue to see data point after data point rolling over and kind of makes me wonder was some of this survey data just well people talking because where is all this demand and why is it not showing up? Why is it not leading to broad growth? This is a challenge because now all of a sudden once again we’re going to see central bankers cutting just like they always do and as we know it’s going to have absolutely no impact or change in the direction of Japan’s economy. Yeah, there was no sustainability to it. Now there was some places like Japan. Japan may be another good example where there was an increase in actual activity. In fact, the only reason Japanese GDP wasn’t negative in the fourth quarter last year was because a boost of imports and that was exactly what you just said. That was the Japanese frontr running the tariffs especially in the automobile uh industry in the automobile marketplace getting a bunch of stuff shipped out and you know headed to the United States before the Trump administration could impose any duties. So there was a burst of activity in Japan. That’s the only reason GDP was negative, but it didn’t carry over. And the reason it didn’t carry over, obviously, you’ve got the payback. You’ve got the artificial high is dead and gone. But also, consumer spending in Japan is weak. In fact, it’s been flat in the last two quarters. So, the fourth quarter of last year and the first quarter of this year, which further undermines the narrative, Steve, as you know, the Bank of Japan kept saying, “We’re raising rates because we’re afraid there’s going to be this burst of pent out pent up demand from consumers who are going to rush to the stores and malls and start shopping.” And so GDP already said, “Well, no, that wasn’t even happening in the fir in this fourth quarter of last year. It sure as hell didn’t happen in the first quarter this year.” So basically everything about this Japanese story has turned out to be the wrong thing, which is again there’s there’s a warning in there for more than just the Japanese. Yeah, Jeeoff, this is a warning all around the world because the slowdown was happening despite the fact of the trade war. And again, we could look back and think that all this demand should show up in some sort of growth that it should have ended up in consumer pockets, but it didn’t. It’s like it disappeared because prices kept going up but wage growth relative to inflation was shrinking. But again, you you’re right. You look at Japan, you think somehow this should have all been a wonderful miracle story of look, finally after decades of deflation and horrible monetary policy and lots of QE that the magic finally happened. And yet what do we find out? It’s just a giant dut. Yeah. This the magic was the pandemic. That was always the the thing, right? I mean, when everybody said that Japan finally escaped the deflation of the last couple decades, what they were really saying is the pandemic did. I’m like, wait a minute here. You’re you’re you’re thinking is way wrong on everything. What happened in Japan was the same as everywhere else. Prices, it wasn’t inflation all of a sudden. It was the price imbalance and the supply shock that hit Japan later than everywhere else because Japan reopened much later than everyone. They didn’t, it wasn’t until, you know, the middle of 2022 they finally removed all the emergency recommendations. So, Japan wasn’t experiencing an inflationary revival that the Bank of Japan was trying to sell everybody. They were experiencing the same problems everybody else did, which meant that all the while, even those three quarters where GDP was positive, they was their consumers, their Japanese people who were being left behind and impoverished by further price changes that were still happening in the Japanese system. You can’t create an economic renaissance and revival based on impoverishing everybody inside the country. So, Japan is simply coming back to reality, and that reality is exactly the same one that we’ve been talking about this entire time. And oh, by the way, now you’ve got these artificial distortions in 2024 and 2025 that have to be even further paid back. No wonder the Japanese are talking about a technical recession in the first half of this year and the second quarter being even more negative than the first quarter because everything fundamentally with Japan is in it’s it’s either backwards or it’s in the wrong way. It’s in the wrong shape. You know, Jeeoff, this reminds me of the broken window fallacy. So, let’s break the global economy. We’ll have a pandemic. We’ll we’ll drain all the supply off of every shelf all over the world. We’ll have people at home. And then when we turn it back on, well, look at all the growth we’re going to create. And then we did. And then the problem is we decided we’re going to have a trade war. Okay, let’s break it a second time. And what happened? Now all of a sudden, we have too much inventory. So, what this is all telling us is yes, you can damage the economy. You can create a shock to it. could break the window, you can repair it, but it doesn’t change the narrative. And that’s the problem here is we already knew and we’ve been talking about that the global economy has been slowing down prior to the pandemic, prior to the trade war. And yes, these were just bumps in the road. But now what we’re finding out thanks to Japan and other countries is is accelerating to the downside. And this is a huge problem because once again, as you said, central bankers, you know, thinking, hey, we got to tighten rates, you know, tighten policy. we got to make this, you know, way better because we’re afraid of all this pent-up demand. Once again, despite everyone believing this, not going to go back to zero, including Jay Powell, they’re going to be back to zero. Yeah, the the Japanese consumers have I mean, they just they never had the ability, never had the never had the wherewithal to escape anything here. And that and we see that in a whole bunch of different ways, too. It’s not just the Japanese consumers, that’s they’ve been belleaguered as they have been for, you know, they’ve been bearing the brunt of all of this for quite a long period of time. And what everybody’s, not just in Japan, but also we talk about consumer confidence here. What everybody’s really afraid of and what they can see coming is that all of this payback that we’ve been talking about since the pandemic and the supply shock that we’re now seeing more clearly in Japan is going to land on the labor market, jobs and income. That’s what everybody keeps saying and everybody keeps seeing and the chances of a real labor market breakdown only rise whatever. You know, that’s the thing about Japan. While Japan was experiencing the positive rebound last year, people were saying, “Okay, the job market’s going to really boom here. That’s going to be a source of inflation.” While the Japanese kept saying, “No, we don’t see it. We’re going to start saving even more. Prices are going up. We can’t afford that. So, we’re going to spend even less.” So, they took it as not an inflationary escape from deflation, but just as a temporary impoverishment on top of everything else. So what we have here, the Japanese are starting to say, “Look, we don’t think we don’t think the labor market’s going to continue to hold up.” Now you’ve got Americans who are deathly afraid of the same thing. Let’s talk about consumer confidence. The University of Michigan survey, which just came out, the flash estimates for May, and it was the same thing, but even more. um almost a record high number of of respondents to the survey said there were they think that uh the the the probability they’re going to lose their job in the next a year or next five years I forget what the question is is it’s the highest that they’ve they’ve ever seen in the survey more than even 2009. So everywhere around the world you keep seeing the same thing which is an economy that can never get going even even when it seems to be going it’s really not. And that eventually people are they know where this ends up. They know it always ends up in the same place and that’s in jobs and incomes. Yeah Jeeoff because it’s almost like the cure for higher prices is higher prices when you don’t get wage growth. And that’s exactly the story of the global economy. Let’s raise prices but we’re not going to raise wages enough for people to afford them. And then the natural reaction just like the Japanese and now Americans are starting to do is hey prices are going up rather than borrow money to pay for them. They realize this is not sustainable because my job is not sustainable my income isn’t. So yes cut spending save more. And then the problem is it back feeds across other parts of the economy. So people are going to work and they’re seeing wait a minute we’re raising prices but demand’s going down and we’ve got some old orders and those are going away. And at some point there’s going to be a lot of us standing around here and that’s not a good thing. And that’s what we’re seeing in the surveys is people are realizing at the same time that businesses are saying we’re not going to lay off. There’s no way we want to do that. There’s that’s the last thing we’re going to do. But here’s our secret list of everyone we’re going to get rid of. But the first step, what do we see? Jolt survey. We’re going to cut job openings. Second step, we’re going to cut hours to existing employees until they complain. And then we stop cutting off the low-end fruit to give the people we want to keep the hours that we need and then we’ll cut their hours too. Yeah, that’s the I mean it all comes back to that same process, that same whole thing is that you know you have what’s really driving consumer fears here is they know that this is going on at their workplace. They it’s not a secret. It’s not some magical you know capitaly economics thing that nobody can understand from a blackbox econometric regression model. This is really simple economics. Back, you know, a couple years ago when prices were soaring ahead and and wages weren’t keeping up, consumers, they were incredibly pessimistic about that, but they, like you said, they borrowed money, they tided themselves through as much as they needed to. It looked like there was a way out of that mess. That’s what 2023 seemed to be, that okay, prices stopped growing as fast. You know, credit was relatively available and things looked like maybe they were going to start to normalize. So, as everybody was pessimistic, became a little bit less pessimistic and thought, okay, maybe there is a way out of this mess. What’s different here in 2025, and this is where the Japan example really comes in, is that everybody’s at the end of the rope. There is no one coming. There’s no cavalry coming to save everybody this time. You can’t go even further into debt because you already did hoping for a recovery that never actually showed up. You can’t do that again. Plus, they realize that employers have been stretched and stretched and stretched over the last couple years, and they’re getting to the point where they’re saying, “Yeah, we’re we’re this is it. We we can’t hang on any further. We don’t see any reason to hang on any further.” And so, as consumers get more and more pessimistic, it’s not about their spending so much as what they’re telling us, about what they’re seeing from the ground up. Yeah, Jeeoff, because you think about 2024, it was the year of hope because you’re right, consumers, they borrowed a ton of money to get through the pandemic, price hikes and all that. And then they bought into the narrative that yes, and everyone told them the economy is going to boom in the second half. Don’t worry, yes, this is just a slowdown and everybody bought into it except the economy. But you saw the confidence surveys go up because people were hopeful. But yet the economy continued to slow. And now all of a sudden, what are you seeing is the confidence surveys are catching up to the reality of the economy because it didn’t change. And it just comes back to, you know, large economies are like large ships. You don’t just turn them on a dime. It’s not, you don’t put a new captain on and all of a sudden everything gets better. It takes time. It takes policies. Like you keep saying, we forgot to grow an economy policy. We’re living with that each and every day. Now what reality is consumers around the world are waking up to it. But the problem is, you know, we have this massive buildup in inventory and now it’s getting even bigger and consumers are saying, “Look, I don’t even know if I’m gonna have a job. And if I don’t, I’m probably not going to get one because there’s are no jobs out there. So, I’m going to cut my spending and I’m going to start saving.” And the problem, Jeff, and you know this, it’s not showing up in the data yet. Steve, I’m going to have to disagree with you here on that. I think it has showed up in the data. I think we’ve seen it like in the producer price index that just came out. The PPI was down an immense amount. In fact, the PPI itself, the monthly rate was the lowest, the biggest decline that we’ve seen in it since April and or March and April of 2020. The services PPI fell by the most on record. And the reason why was because margins compressed and got squeezed, which says that businesses could not pass along cost increases to their customers. All the media reports are, well, businesses are choosing to absorb their costs. And as you always say, they’re not charities. They don’t do this out of the goodness of their heart. They’re not doing everyone a favor. What they’re saying is if we raise prices, we have to sacrifice volume. And so what we’re thinking here is that the the sacrifice in volume will be greater than the hit to prices. So we’ll just keep prices lower and lower prices in the in the short run until we have no choice. That’s what Walmart actually said. What Walmart said is we don’t want to raise prices. We know what happens when we do. We’ve seen it all throughout the economy. Anybody who raises prices, volume just falls off. But then Walmart’s turned around, the management team turned around and said, “We don’t have a choice. Prices are our costs are going up. We’re not going to sell things at a loss.” So, we realize we’re going to take a volume hit and we don’t know how big of a volume hit it’s going to be. And as consumers, as workers hear all of this going on, they know what’s coming. They know what’s next. As businesses take these hits that they can’t afford to take and they’re out of the rope, they’re out of the runway, they’re going to come down to the pink slips. They’re going to start filling them out and and handing them out to their employees. See, Jeeoff, I think the economic data is going to get a lot worse. I know it’s come down. I think this recent drop in the consumer confidence survey is just a foreshadowing of what’s going to show up over the next several weeks as we start to get more data again. And I think it’s going to be eye opening for a lot of people because there’s this belief that okay as soon as we ink a bunch of deals with countries that you know it’s going to write the ship we’re going to be back on path but I look at this is we hit the economy with a massive shock here. There was a lot of pulling forward of demand. At the same time people are really nervous going forward. you know, just because, you know, we ink a deal with somebody, doesn’t mean consumers are like, “Oh, well, great. Let me go out and spend because if it doesn’t translate into the old fax machine at work running, as I like to say, they’re going to go to work and realize I have nothing to do.” And they know their employers aren’t infinite money machines, and it’s not going to last. And that’s what consumers are saying. Look, it’s going to get worse. And I think the data is going to show that. That’s where Japan is, right? The data in Japan is already saying it. Yeah, you’re right. St. I mean, even if there are a bunch of really good trade deals and goods a relative term, but even if there are relative relatively good trade deals, what does that mean? Doesn’t mean tariffs go back to zero. It means that they’re going to be more tariffs. It just maybe not at the extreme cases that they were talking about between the US and China earlier, but there’s going to be some price cost margin pressures to the economy that’s substantially more than what we saw beforehand. And like I said, I think the data we’re getting, while not as conclusive as many people like or would like it to be, it is already suggesting exactly what we’ve been saying, which is consumers can’t handle it. Businesses can’t handle it, and they’re in no shape to try to to do anything that other than exactly the same type of recessionary processes that we now see showing up in Japan, especially with Japanese household spending, which is falling off even more sharply. You know, Jeeoff, my fear is even if we went back to the pre-tariff thing and this all ended tomorrow, I think the damage is done. And that’s my fear. I think when it shows up and hits in the data, it’s not just going to be, you know, hey, this is what happened. It’s like it’s going to get worse because consumers at this point, they’ve already cut their spending back. And I think that’s what we haven’t seen is a real full force of the US consumers saying, “I’ve had enough.” Now, we’ve seen the airlines say, “Hey, demand’s down, but people are going to drive more.” But there’s going to be a point where people like we can’t afford to do even that. That’s what I’m waiting for because I know there’s this belief right now that as soon as this is all done, everything back to normal. I I don’t think that happens. Well, the first data we got from, you know, consumer confidence here in May backs it backs it up entirely because what consumer confidence fell further in May despite the trade delays and the the appearance of trade deals and everything. Now, wasn’t the consumer survey didn’t happen with the China US truce and everything like that, but May economists were expecting consumer confidence to turn higher in May based on everything that you said, Steve. And instead, it went even further in the wrong direction because consumers like Steve are telling everyone, we don’t see it that way. We see things that are it’s almost like it’s all baked into the cake right now and there’s really nothing much that can be done about it.

Japan did indeed fall back into recession in the first quarter before the tariff shock even had a chance to hit the economy, and positing a deeper negative GDP print than expected. Like everywhere else, the setback is being led largely by consumers. At the same time, American consumer confidence fell to another shocking low rather than rebound with trade deals and a rebounding stock market.

Eurodollar University’s conversations w/Steve Van Metre

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