The Japanese economy shrank at 6.3% annualized in the fourth quarter. Forget talk of recession, it's already underway.

A Japanese recession has started but you might not understand that if you read some reports.

The lead image is from Coronavirus Threatens Japan Rebound as GDP Falls Most in 5 Years.

Blue text and square anecdotes are mine.

The BBC reports Japan's Economy Shrinks at Fastest Rate Since 2014

Annualised gross domestic product (GDP) fell by a much steeper than expected 6.3% in October-December. There are also concerns the coronavirus outbreak will mean the slump continues this quarter. That has raised fears that the world's third-biggest economy may fall into recession.

During the period Japanese consumer spending fell 2.9% after the country's sales tax was raised in October to 10% from 8%. In the same month Typhoon Hagibis hit large parts of the country. Last quarter, capital spending dropped by 3.7% and exports slipped 0.1% amid the ongoing US-China trade war.

Investors are now watching to see whether the economy will rebound after the coronavirus forced China to shut down factories and led to a big drop in Chinese tourists visiting Japan.

How about a little realism here?

The Japanese economy shrank 6.3% annualized even before the coronavirus impact.

Reuters reports Coronavirus cases rise again in China as recession looms for Japan, Singapore.

The number of reported new cases of coronavirus in China’s Hubei province rose on Monday after two days of falls, as authorities imposed tough new restrictions on movement to prevent the spread of the disease which has now killed more than 1,700 people.

With no end in sight for the outbreak, Japan and Singapore appeared to be on the brink of recession with data on Monday pointing to possible contractions in the current quarter.

Across China many factories remain closed following the extended Lunar New Year holiday, disrupting supply chains around the world. Virus-related damage to Japan’s economy is expected to show up in the current quarter, stoking fears of recession in the world’s third-largest economy.

Fears of recession, or already in a recession?

The New York Times reports Japan’s Economy Shrank Sharply. Now Comes the Coronavirus.

After hits from storms and a tax increase, the world’s No. 3 economy could face recession as the outbreak takes a toll on tourism.

Japan’s economy has already been staggered by a devastating typhoon and a wallet-shutting tax increase. Now, the coronavirus that has brought business in neighboring China to a virtual standstill threatens to knock Japan into a full-blown recession.

If Japan’s economy — the world’s third largest after the United States and China — shrinks again in the first quarter of 2020, the country will officially fall into recession for the first time since a brief dip in 2015. A recession is generally defined as two straight quarterly contractions.

I will come back to that definition in just a bit but it is not a good definition nor is it accurate.

Third Fatal Mistake

The Wall Street Journal reports Japan’s Third Sales-Tax Blunder Must Be Its Final Mistake.

Japan’s economy shrank sharply in the final three months of 2019, logging its second-worst quarter in the past decade. That would be easier to stomach if it weren’t because of a mistake policy makers have now made three times.

In October, Japan raised its sales tax to 10% from 8%—and spending tanked. Household consumption fell 11.5% on an annualized basis in the October-December quarter, fueling a 6.3% fall in annualized gross domestic product.

Sales-tax increases in 1997 and 2014 likewise knocked the economy off course. The three worst quarters for household consumption in the past quarter-century were those in which sales tax was raised.

Michael Pettis On Japan's Mistake

Important point: "Weak real growth in household consumption reflects both weak wage growth and a shift in the tax burden away from firms toward households."

Under these conditions, only rising household debt can keep consumption growing. https://t.co/d6HSpiAACl

— Michael Pettis (@michaelxpettis) February 17, 2020

Great Recession Flashback

In the early months of 2008, many observers believed that a U.S. recession had begun. The collapse of Bear Stearns and the resulting financial market turbulence signaled that the crisis would not be mild and brief.

The former head of the National Bureau of Economic Research [NBER] said in March 2008 that he believed the country was then in a recession, and it could be a severe one.

According to numbers published by the Bureau of Economic Analysis in May 2008, the GDP growth of the previous two quarters was positive. As one common definition of a recession is negative economic growth for at least two consecutive fiscal quarters, some analysts suggested this indicates that the U.S. economy was not in a recession at the time. However, this estimate has been disputed by analysts who argue that if inflation is taken into account, the GDP growth was negative for those two quarters, making it a technical recession. In a May 9, 2008 report, the chief North American economist for investment bank Merrill Lynch wrote that despite the GDP growth reported for the first quarter of 2008, "it is still reasonable to believe that the recession started some time between September and January", on the grounds that the National Bureau of Economic Research's four recession indicators all peaked during that period.

In March 2008, financier Warren Buffett stated in a CNBC interview that by a "common sense definition", the U.S. economy was already in a recession.

The above from Wikipedia Great Recession in the United States.

Real Gross Domestic Product

The NBER is the official arbiter of US recessions. The NBER pegged the Great Recession start as December of 2007.

However, the above chart shows that US economy grew in the fourth quarter of 2017 and second quarter of 2018.

There were not two consecutive quarters of negative GDP. There was not even one!

Two consecutive quarters of negative GDP is a sufficient condition but not a necessary condition of a recession.

Economic writers constantly struggle with this construct.

Common Sense

Note to economic writers: Please refresh yourself on the difference between necessary and sufficient.

With the Japanese economy collapsing at at a 6.3% annualized rate in October-December and with a coronavirus tourist collapse in the first quarter, by any common sense measure Japan is already in the midst of a severe recession.

And forget any talk of "technical" recession, this one rates to be severe. The coronavirus is certain to amplify a very poor sales tax hike policy decision.