Japanese economy turns corner

Spurred by a 6.4 percent jump in exports, Japan seems to have turned a corner with regard to its most serious recession since World War Two.

The economy recorded growth for a full quarter, the first time since the global financial crisis last year. The cabinet office released the encouraging figures on Friday revealing an increase in GDP of 3.8 percent annualized rate for the quarter.

The sudden jump in exports is the first rise since Lehman Brothers collapsed last year and the largest increase for over seven years.

Japan has followed in the footsteps of the two largest economies in Europe, Germany and France, who emerged from recession in the latest quarter.

Few analysts believed that Japan, the world’s second largest economy, would turn the corner so quickly. The country relies heavily on its exports for consumer durables such as cars and electronics, and a downturn in world demand in that area was what many blamed for their economy’s decline in the first place.

Now that economists have seen Japan clawing their way back into growth, there is cautious optimism regarding other big economies.

The United States economy experienced its smallest contraction in a year, only 1 percent annualized for the last quarter. Meanwhile, in the euro zone, there was only a 0.2 percent contraction. Having invested over half a trillion dollars into stimulus, China has seen growth of nearly 8 percent from the first quarter.

Although these latest figures may not be enough to save Japanese PM Taro Aso and keep his party in power after the coming general election, they do seem to bear out Aso’s promises that Japan would be one of the first countries to emerge from the darkness.

Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management said, “We have definitely seen some excellent short term benefits from Aso’s policies. Some politicians mocked his methods only a few months ago but I think the general sentiment now is that his cash hand-outs and green energy incentives have come up trumps.”

The increase in exports is a welcome respite from the crunch brought on by last year’s crisis and over 12 months of contraction including a record breaking 13 percent annualised dip in gross domestic product in late 2008.

Other nations in the region have also reported growth in the last quarter including China, South Korea and Singapore which has surprised many observers.

Economic downturn is slowing

Although most of the Wall Street regulars who insist the economy will get back on track soon have quietened down, a few of the die-hard optimists are putting forth a clever bit of maths to back up their opinions. They say that the second derivative is turning positive, meaning that, although the economy is still suffering a massive downturn, it is happening at a slower rate.

It has taken some hearty research and some stretching of statistics but they do at least have some morsels of data to back up their assertion. One encouraging sign has been the increase in retail sales, which gained 1 percent in January compared to the previous month, which is the first jump since last June.

Another factor is car sales. Although the figures fell overall, the data for private individual buyers remained relatively stable.

Many observers expect the economy to contract at a slower pace in Q1 than in the last quarter of 2008, but only because of some complicated revisions to the annualized figures.

JPMorgan Chase analysts have cut down the risk of a “micro-recession” with an index that has revealed the margin of uncertainty in the economy and the markets has shrunk a small amount.

Most will agree that the gigantic government and Federal Reserve stimulus packages since October have seen a turnaround in corporate bond yields, which have crept down, and interbank rates improving for the public with the money supply swelling.

Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management remarked recently that the levelling out of opinion suggests that both demand and manufacturing might be coming back to their normal margins, but tempered those comments with a warning that what we are experiencing is still somewhat in the vacuum of the financial crisis.

“Obviously what is going on now is not part of a normal economic cycle,” Chambers said on his blog Friday. “It’s always a good thing, however, when sentiment levels out. A production line of uniformly negative data reports is not going to help anything or anyone. Some optimism, albeit produced by some math juggling, is a ray of light…and we need that at this point in time.”

However, negativity still reigns. A 17 percent drop in housing starts occurred at the beginning of the year which reveals the bottom is unlikely to be reached anytime soon in that sector. There are also scant encouraging signs in the area of credit, with supply not even close to returning to normal levels.

More encouragement for Japanese economy

It seems the Japanese economy is on the up again as official data released today has shown that machinery orders in the country jumped quicker than predicted in November.

One of the best indicators of investment in the industrial sector is core machinery orders. Reports show these figures were up nearly four percent in November from the previous month’s orders.

Many analysts see this data as confirmation of a growing view that the nation’s latest economic upswing will be more due to corporate spending as opposed to public spending in the coming year.

Other experts observing events are not as sure the core orders are such a decisive factor, and many doubt that the better than predicted figures released today and last week will spur the BOJ to raise interest rates. The central bank will meet next week to discuss the issue.

Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management said, “I’m not convinced the data we have seen over the last few days is going to force the BOJ’s hand on interest rates. I think they will take a much broader view of the economic landscape before making any major decisions.”

Others, like chief of FX sales and trading at Societe Generale Hidenori Kato, believe machinery orders will be “the big factor” that will bring in increased rates.

The Bank of Japan meets on the 14th to decide whether or not to move rates from their current 0.25 percent level. That rate was set in August 2007 after a run of over 5 years with a zero interest rate economic policy.

Morgan in $10 billion sell-off

In its latest efforts to save itself from this year’s credit crisis, Morgan Stanley has completed an agreement to sell a chunk of the troubled firm to Japanese holding company Mitsubishi UFJ.

The deal, which was announced on Tuesday, is thought to be worth nearly $10 billion and will be encouraging news for investors who will be hoping the US financial giant can make it through the most turbulent year in its prestigious history.

After the news hit the trading floors, Morgan Stanley shares staged a monumental rally, increasing nearly 90 percent. They had previously fallen substantially amid rumours the deal may not go through.

There was even a danger that the company could suffer a Lehman Brothers type total collapse if the agreement fell apart, which was a possibility up until only a few days ago.

“I’m sure investors will be relieved at a $10 billion funds injection,” said Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management in a comment on his blog.

“At the moment it’s the only available move for the Americans, it’s all about survival at the moment and the investors need to know they are covered.”

Morgan, headquartered in New York, were involved in lengthy talks with Mitsubishi over the last few days, going through the terms of the deal which was first made public nearly a month ago.

According to insiders, Mitsubishi were trying to bargain a cheaper deal as Morgan’s stock fell dramatically since the proposal was announced. The original offer by the Japanese firm was for a mixture of common and preferred stocks.

After a new deal was hammered out, Mitsubishi will end up with a 20 percent ownership stake in the New York firm for a $10 billion stock payment, 10 percent of which comes back to Mitsubishi in the form of dividends.

It’s thought the US authorities themselves got involved with the talks, offering the Tokyo bank assurances that their investment would be a safe one. The government have a vested interest in the deal as it would calm the anxious mood in the markets and raise sentiment, vital factors if the country’s economy is to claw itself out of the current crisis.

Morgan Stanley boss John Mack said in a press release on Tuesday that the deal had “strengthened our position and brought about a critical alliance between two great companies looking to move forward in these most difficult and challenging times.”

Economic competitors now building ties

After Japan’s miraculous post-war economic recovery, it became the undisputed titan of Asia and currently sits at the pinnacle of world economies, second only to the United States.

Even though China is down at fourth in the world rankings, its growth is off the charts since its first boom in the eighties, and it continues to roll on like a freight train. In the last couple of decades Japan has not kept up with its noisy neighbour’s double–digit growth figures, only managing 2 percent in 2007 compared to China’s 12 percent.

Many analysts now believe China should really be higher up in the economy rankings, if certain important indicators were given more precedence.

The rivalry of the two ancient and dominant Asian cultures has led to many conflicts in political and economic arenas.

A good example is the significant need and competition for energy imports. Although China has a fair amount of coal resources, both countries depend almost entirely on imports for energy, mostly oil and gas, to fuel their rampant economies.

The energy war has produced periods of raised tensions and, in turn, maritime border and island disputes in the East China Sea, an area where there are known to be oil and gas reserves yet to be tapped.

Despite this, economic partnership between the old enemies has gotten much closer in the last decade. With the two nations accounting for nearly 80% of economic activity in East Asia, it makes sense to work together.

Bilateral trade between Japan and China reached a huge $240 billion in 2007, a figure which means China has overtaken the United States as Japan’s biggest trading partner. China has, since 2004, become the number one market for Japanese exports and the trend is only increasing.

Mutual investment is also on the rise, although still heavily slanted towards Japanese firms investing in China. Money is beginning to move the other way more recently.

Analysts say the relationship is extremely beneficial to both sides and can improve. Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management said in a phone interview, “China is always looking for new investment and technology to boost its already motoring economy, Japan is a good fit for that. Meanwhile, Japan will always want a growing and nearby market for its exports. It’s a wonder the two nations haven’t forged closer links before.”