Japanese Weakness Underlines Global Growth Hazards

In what has become a sad but familiar pattern, Japan's economy is headed for another dip, partially thanks to an unsustainably strong yen. 78 yen can buy a dollar Monday morning, a rate that makes Japanese goods much too expensive for effective export. Last week, the yen reached an eleven-year high against the euro, proving the Japanese currency's problems are endemic. That high yen has caused export sales to fall, with Japanese car sales overseas dipping in June. Domestic sales have gone up over the same period, but that is primarily due to government stimulus programs that provide incentives for the purchase of fuel-efficient cars. That program will end around mid-August, at which time domestic sales will also slide, with future purchases having been pulled forward by the incentive program. A similar pattern in the U.S. emerged with the cash-for-clunkers program. Once those domestic sales fall off, Japan could be in real trouble. Already, Japan's industrial production fell 0.1% in June, following a 3.4% dive in May. That fall contributed to a slowdown in GDP of similar magnitude. Japan's GDP was advancing at a 4.7% clip the first three months of the year, looking like the country might finally have broken its decades-long slump. However, GDP growth likely dropped to 1.6% in the second three months of the year -- bringing the threat of further stagnation back to the fore.

The news out of Japan might not be so worrying –- if we didn't see similar weakness elsewhere. Korea's consumer confidence dropped to 70 from 81 last month, with the country teetering on a possible recession. Spain's recession has deepened, with GDP likely falling 0.4%. The UK has had its third straight recessionary quarter, dropping a larger-than-expected 0.7% (and the Olympics are unlikely to move that number much). France, after coming in entirely flat (0.0%) last quarter, is expected to slip into recession in quarter two. And the U.S. GDP rate disappointed recently, revised downward to a 1.5% growth rate. Even India and China, long the models of growth, are seeing drastic GDP reductions. Chinese GDP growth has fallen to 7.6%, the lowest rate in the past three years -– and many economists think the true number is much lower still. Perversely, many of these disappointing global numbers could cause markets to rally. That's because, the worse the underlying conditions, the more likely we'll see active intervention from the central banks. This week Mario Draghi, head of the ECB, and U.S. Treasury Secretary Timothy Geithner meet to discuss possible action. Draghi already caused markets to rally last week when he declared he wouldn't let the euro die. That declaration –- with no concrete steps attached –- was enough to lead to some of the best days this year. That might mean we'll see more short-term happiness in the markets. But the health of the world economy –- and especially Europe and Japan –- is in a very precarious position.