Japan defies forecasts with solid growth

Attempting to extend a recovery from their worst recession in decades, Japan’s economy gained at its fastest rate for two years in the last quarter.

The eight year downturn in Japan’s fortunes was reversed in the previous quarter and the trend has continued, assisted by excellent export figures and no little stimulus from the government.

The economy has been growing at double the rate experts predicted, with a 1.3 percent gain in Q2 from the previous quarter, translating to a 4.9 percent annualised figure.

“It’s nice to see Japan’s economy moving forward, it’s a good sign for the whole region,” said Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management on his blog. “We believe Japan will avoid any second dip in its economy this year. It’s important that international trade remains steady and the monetary easing brought in by the government continues to have a positive effect. We should see growth push on into Q4,” he added.

Third quarter exports leaped 6.5 percent with a significant rise also seen in household and corporate expenditure.

The recovery comes on the heels of Japan’s worst contraction in recent years, with the export-focused economy suffering double digit annualised contractions in the previous two quarters before the upswing.

Other analysts say we should not be getting carried away with the figures as much of the performance can be attributed to unsustainable corporate inventory restocking.

The data remains upbeat, however, and follows reports that the European financial bloc has finally dragged itself out of recession in Q3.

Japan became embroiled in the worldwide recession as demand for its major exports, cars and electronics, was substantially reduced in the middle of 2008. The government will be hoping its stimulus package will keep current growth expanding after the economy returned to positive figures this year.

One major issue has been the ageing population which is shrinking rapidly. The future hardly looks bright for consumer spending, even though the government has promised to stimulate domestic spending with incentives, leaving the country primarily focused on its foreign trade to drive growth.

The Bank of Japan recently forecast 2 straight years of deflation, which may threaten the recent recovery. Falling consumer prices will only put more of a burden on Japan’s exports.

Poulson added, “The nation’s GDP is strong and that’s a great indicator. There are one or two things that need to be adjusted for healthy continued growth and I’m sure the economic authorities are well aware of the weak spots and have a plan in mind.”

Evidence of upturn in world economic system

According to a recent report released by the IMF, significant changes in policies and a small jump in recovery rates has seen the global financial system with much less risks than a year ago.

The six monthly Global Financial Stability Report (GFSR) released in August does warn that there is a long road to travel until full recovery, however, and governments will need to continue to be stern in their policy actions.

The Director of the IMF’s Monetary and Capital Markets Department José Viňals commented, “I would say that there are some very encouraging signs, but we are not out of the woods yet.”

Risks are likely to rear their ugly heads again should banks fail to do something about their balance sheets. Without that, they will be unable to provide the loans necessary to support solid financial recovery.

Viňals added, “It’s vital we face the on-going challenges today rather than putting them off. If we don’t act decisively and quickly we will lose the recovery traction we have gained so far. We can’t afford to let that happen. The upturn must continue steadily.”

Markets steadying

Wide spread monetary easing techniques by many governments has allowed the steadying of bank balance sheets and in general stabilized the rocky economic system. A knock on effect has been a rebound in stocks and other risk assets.

Emerging economies, especially in Latin America and Asia, have also benefitted from the new found stability in the core markets. Tail risks have been reduced due to the lending capabilities of the IMF.

The report said that in order to sustain this kind of recovery, there was need for a concerted strategy to ground sentiment and mitigate the formation of systemic risks.

Commenting on the report, Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management said “The markets have improved, that’s true, but we don’t want that to result in a widespread loss of urgency and for markets to lapse. A complacent attitude would be disastrous at this stage. We need to go forward with the recovery boldly.”

It is widely thought the danger of a full banking collapse has now been averted with huge recovery of earnings and funding being reopened to financial institutions. The GFSR data reveals there has been a huge drop in write-downs from bad assets, by more than $500 million in the last semi-annual period.

Japanese economic growth best in two years

Japan's economy defied expert predictions and grew at its fastest rate since 2007 in Q3 of this year, continuing the promising recovery from its worst recession since the war.

Monetary easing stimulus by the government can take much of the credit for the upturn, but the nation has also seen a massive rebound in its exports, especially cars and home appliances.

A government report released Friday revealed the expansion is occurring at about double the pace forecast, swelling by 1.3 percent compared to the previous quarter and nearly 5 percent annualised.

“We hope that the recovery will continue into the last quarter of the year, we think it will,” said Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management in an email to investors. 

“As long as the current trend in exports stays on track and the effect from the authorities easing continues then we would say the worst is over and there will be no second drop.”

Both family spending and corporate expenditure went up by about 1 percent compared to the second quarter. The best news, however, was exports which jumped a huge 6.5 percent.

The upswing in fortunes follows a calamitous series of contractions in the nations export driven economy, although many specialists are warning that the stellar figures may be in part due to inventory restocking for corporate entities and said that Q4 may see less growth.

“You have to take into account the unsustainable contribution linked to private inventories,” says Kyohei Morita, head of Asia region economist at Barclays Capital.

However, sentiment is largely positive and the news from Japan came shortly after revelations that the biggest economies in Europe, France and Germany, have clawed themselves out of recession in the last quarter.

Japan tumbled into recession as a flagging world economy in 2008 resulted in less demand for its major exports such as electronics and cars. This is a welcome return to positive growth, but many are cautious and point to a time when the Japanese efforts to stimulate the markets loses its effect.

Consumer spending is likely to stay low, especially when one considers the shrinking and ageing demographic of Japans population, so the country will continue to rely heavily on its export business to push all round growth into next year.

This may force the authorities to introduce incentives for domestic demand such as cash hand-outs and further drops in consumer prices.

Japan climbs its way into positive growth

After nearly 1 percent of economic growth in the last quarter, Japan seems to have finally clawed itself out of recession, after a full year of contraction.

However, analysts fear the recovery is largely due to government policy action and that it will be difficult to keep this momentum going once stimulus packages are stopped.

There were encouraging signs from Europe with two of the major EU economies, France and Germany, coming out of recession. Also, Hong Kong has come through the worst of the crisis and is reporting growth this quarter. Overall, the world economic news is showing that a global recovery is around the corner.

The first positive growth in 12 months didn’t save the Nikkei from dropping over 3 percent however, revealing the growth was not as big as traders predicted.

Japan’s export-driven economy was dragged into recession in 2008 as global demand for its home appliance products and cars slowed dramatically.

This led to government intervention in the financial markets, with a stimulus injection totalling nearly $300 billion ploughed into a flagging economy. The authorities also brought in landmark incentives for purchasing green energy cars, and offered cash hand-outs to certain members of the population.

Due to an increase in demand in China in the latest mini-recovery, manufacturing firms in Japan have benefitted, with export figures increasing 7 percent last quarter.

The future certainly looks much rosier, even considering the poor domestic private consumption by the nation’s ageing population, which rose less than 1 percent despite the government’s hand-outs.

“We are definitely seeing a positive turn-around,” says Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management. “The cautious and pessimistic sentiment seems to be ebbing away now and the Japanese economy is back on the rise. It’s still a long road back to full recovery, but it’s a start.”

“We will see how the economy fares after the stimulus packages finish,” Poulsen added.

Japan’s economy can fluctuate wildly due to its reliance on its export business. When last year’s crisis hit the top world economies, the flagging demand for Japan’s products hit the country hard and it spiralled into recession, quickly following the United States and Europe.

Any recovery in other financial zones will be most welcome for Japan, as it would see a rise in exports to those economies and stimulate its own growth.

The Japanese government have increased its forecast for growth based on the encouraging news from abroad.