Depression in the east points the way for the rest of the world

Larry Elliott, Economics editor

Anybody who doubts that the global economy is facing its most serious downturn since the 1930s should take a squint at the latest trade figures from Japan. Exports in January were 46% lower in January than they were a year ago – a phenomenal drop for a country that is so heavily dependent on sales of its industrial products overseas.

Japan has got used to economic setbacks over the past two decades: it has been in and out of recession on a regular basis. But make no mistake, this drop in exports does not mean recession: it means depression.

In the circumstances, comments by analysts that the data was "not good" and "seriously bad" were somewhat otiose. The Office for National Statistics confirmed today that the UK economy shrank by 1.5% in the final three months of 2008 and is on course for an annual decline in GDP this year of between 2.5% and 3%. But in Japan, things are much, much worse. Maya Bhandar at Lombard Street Research, says that the economy is contracting at an annualised rate of 14-15% in the current quarter. Strong exports have tended to disguise the weakness of Japanese domestic consumption in recent years: now that prop has been kicked away, growth is plummeting.

Why is this happening? Quite simply, the great engine of globalisation has gone into reverse. During the long boom, the US acted as the consumer of last resort: it sucked in exports from China and Japan. As China industrialised, it needed high-grade investment goods from Germany, and as prosperity spread in the world's most populous country, there was strong demand for Japanese electronics, cars and consumer gizmos. Now that America has stopped spending, Chinese factories have closed. The knock-on effects of that are being felt in Tokyo and Hamburg.

In Japan, all the main industries are reporting decreases in exports of more than 40%. The big car companies – Toyota, Nissan and Honda – are really feeling the pinch: overseas sales by the transport equipment sector were down almost 54% on a year ago. What's more, car sales are slumping everywhere: J apanese exports to North America, Europe and the rest of Asia were all down by more than 50%.

The assumption, since the financial crisis began in the summer of 2007, has been that lessons have been learnt from the Japanese experience in the 1990s. Much comfort was taken from the fact that Ben Bernanke, the chairman of the US Federal Reserve, had produced an erudite paper on how to avoid the deflationary problems suffered by the world's second biggest economy.

As things stand, that optimism is starting to look a tad misplaced. It is not just that the generalised falls in industrial production over the past few months has been far worse than anything experienced by Japan in the 1990s; it is also that policymakers – including Bernanke – do not seem to have fully assimilated the lessons of the Japanese experience.

Japan's problem in the 1990s was not that the government failed to act: there were any number of emergency packages and bail-outs for the stricken banks. But nothing Tokyo did got to the heart of the crisis, which was that land prices continued to fall year after year, creating fresh losses for the financial system as quickly as the last batch of toxic waste was cleared up.

Something similar is happening now to Wall Street banks. With real-estate prices in freefall, the losses just continue to mount and the pressure on the banks remains acute.

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