Looking at the Japanese economy

Business analysts were of the view that the Japanese economy will register growth during the third quarter. However, all such notions received a setback when data proved that the Japanese economy had actually contracted during the third quarter. In such a situation, Prime Minister Shinzo Abe's decision to delay the implementation of a sales tax hike comes across as a far-sighted and a good move.

The revised Gross Domestic Product data proved that the previous Aprils sales tax hike had in fact hit Japan more strongly than was expected. The data clarified that the Japanese economy had actually slumped by 1.9 percent and not 1.6 percent, which was the predicted number. These statistics prove that Abe and the Bank of Japan have a gigantic task ahead of them - pulling Japan out of deflation is not going to be easy.

Japan is about to witness a snap election this coming Sunday. Abe and his supporters firmly believe that the induced delay in the sales-tax hike combined with stimulus policies will win him voters. Media houses have already predicted a victory for Abe's coalition.

Stuart Poulson Head of Corporate Trading with Tokyo and Toronto based Nikko-Desjardins Asset Management says:

“A mediocre hike in wages will impact private consumption and economic activity in a negative way. What's worse is that manufacturers, too, are getting anxious. This has led to a slump on the production side as well.”

A decline in business investment is driving these negative changes in the Japanese economy and has led the GDP to decline. Whereas analysts believed that business investment will fall by 0.2 percent, it actually went down by 0.4 percent.

The initial survey sample base did not include small businesses which have been witnessing fragile spending. The inclusion of these small businesses further pushed down the revised GDP figures.
In April, the Japanese government hiked the sales tax from 5 percent to 8 percent. The sales tax was hiked to create a fiscal stimulus and facilitate structural reforms. However, the tax hike hit the economy negatively by reducing the overall household spending. 'Abenomics' already has fingers pointing towards Prime Minister Shinzo Abe.

GOVERNMENT IS FACING POLICY CHALLENGES
Policies based on 'Abenomics' actually delivered results in the start. Initial measures taken by Abe and his cabinet weakened the Yen and promoted investment. This led to a growth in the household income and business investment. It also increased stock prices of important players. And thus, despite two quarters of slow down, Japan's economy is still doing better than what it was back in 2012 when Abe took oath as the country's Prime Minister.

More recently, when Abe pushed the second tax hike (which will bring the country's sale tax to 10%) to 2017, he broadened the scope for consumer spending which makes 60% of the total GDP.
However, the technical recession that Japan is facing has also proved that Abe and his cabinet must take more actions and introduce more effective stimulus policies to drag Japan out of deflation.
Mr. Poulson says:

“The government has been in office for two years now and yet, wage hikes and capital spending have only been mediocre.”

The monthly Reuters Tankan registered weakened business interest. The Reuters Tankan survey has also predicted a decline during the fourth quarter. This is a sign of concern, especially for the Bank of Japan.

In April last year, the Bank of Japan induced a massive stimulus to bring inflation to the targeted 2 percent. The Bank further pushed this stimulus in October. However, the Tankan survey's results have caused anxiousness among analysts.

If these policies do not fare well during the BOJ tankan survey scheduled to take place on December, 15, it would mean that the bank's stimulus program hasn't done well. In such a scenario, the BOJ may come under pressure to expand its stimulus again.

However, it is assumed that the BOJ will not change its policies and instead, will encourage its idea of a buoyant economy during its next meeting which is scheduled to happen on December, 19.
Many economists including Mr. Poulson are of the opinion that Japan's economy will regain momentum during this quarter. Households and businesses are slowly recovering from the last sales tax hike. The consumption has shown signs of recovery. Likewise, exports are also likely to register an increase during this quarter. This is a sign of relief as exports have remained largely low even after Yen going down against the Dollar.

Source

Stuart Poulson – Nikko-Desjardins Asset Management

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Japan introduces new financial stimulus

The lower house of the Japanese parliament has given the green light on a new sixty billion dollar stimulus package which they hope will boost small businesses and consumer spending with the end goal to create new jobs and push forward the nation’s tentative economic rebound.

This is the latest in a string of packages the government has previously introduced, with recent figures showing that the nation’s consumer prices have dropped for the twentieth consecutive month.

The government have worked hard to get this latest package through parliament, and today’s vote represents a significant victory for prime minister Nato Kan.

Japan’s stimulus methods are frowned upon by western nations, who prefer to concentrate on decreased spending to ensure economic recovery.

Japan, the world’s second largest economy, has been battling against a high yen, deflation and decreased growth and their core consumer price index dropped by 0.7 percent compared to last year, latest data showed.

Deflation is one of the factors that stunts growth the most, as consumers hold off on their buying until prices drop further. Analysts say the recent upswing is not necessarily a sign that consumer demand has improved.

“Yes, there was a slowdown in the decline in prices in the latest study,” said Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management in an email to clients, “But we needn’t get carried away, this may not be an accurate reflection of the demand-supply situation in real terms.”

“We could be looking at one-off factors affecting the balance, such as an increase in cigarette prices. 

In summary, it looks like the recovery from deflation may take a little longer than forecast,” Poulsen added.

International trade has become less attractive due to the high yen, a factor the government has been attempting to keep in check with qualitative easing methods. With Japan’s economy heavily reliant on its exports, a slowdown in growth for the sector can have a hugely negative effect on the financial landscape.

Not only that, but it is apparent that a weakened export business will cause consumer demand to drop.

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.