Japan's Shrinking Economy & Strong Yen

If Japan's economy has hit bottom, it's pretty far down. The world's second-largest economy marked its worst-ever quarter of GDP, with a contraction of 4%, government figures revealed. That's far worse than the U.S., where the economy shrunk 1.6% last quarter, or Europe, which saw a 2.5% hit.

Japan has suffered from a strong yen, which has crippled its exporters, who are finding it difficult to drum up demand overseas for their goods. Companies' capital spending dropped 10.4% as they declined to invest in new factories or equipment. Deflation has hit as wages drop, unemployment proliferates, and households ruthlessly cut their budgets. In addition, the Japanese consumer has retreated even further into frugality, with consumer spending dropping 1.1%.

The biggest problem is in private spending, always an issue in Japan, where it's considered inappropriate to spend lavishly. Now that the traditional lifetime guarantee of a steady, well-paid corporate job no longer exists, consumers are afraid to spend money on themselves. "I believe that a worsening of conditions in the corporate sector is starting to have an impact on households," said the prime minister, Taro Aso, speaking to parliament after the GDP figures were released.

Aso's government is spending $160 billion to stimulate the economy. Measures include cash payments to residents and tax incentives to buy eco-friendly cars, among other programs. In response to the stimulus checks that are arriving in the mail, many businesses are running "stimulus specials" for 12,000 yen ($120), the amount of the checks per adult. (Children received $200 from the government.)

But many Japanese consumers will likely save the money instead. All but the youngest workers remember the country's "Lost Decade" in the 90s, and few want to live through the privations of a long recession without money in the bank.

Reuters contributed to this article.

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