Japan heads into its snap election this Sunday with the economy in a deeper recession than previously thought – but don’t tell voters who will overwhelmingly re-elect Prime Minister Abe; or the stockmarket, which regained the 18,000 point mark yesterday for the first time since the middle of 2007.
For Australia’s second largest trading partner, the news of the deeper recession was more bad news.
The economy is struggling, exports are weak, but investors don’t care and nor does the Japanese electorate, even though they had to deal with the sales tax rise on April 1 this year.
In fact the stockmarket reaction in Tokyo yesterday to the weak economic news was similar to the one in China to the unexpectedly poor trade figures for November.
The Nikkei rose 1% in early trading, topped the 18,000 point level, then eased to close up 0.1% at 17,935, a seven year high.
Also helping were fresh seven year lows for the yen against the strong US dollar.
But a revised estimate for third quarter GDP was a big surprise. Not only was it confirmed that the economy fell into recession in the second and third quarters, but businesses cut back spending more than first projected. The contraction in the June quarter was revised upwards.
The economy shrank by an annualised 1.9% last quarter, or a fall of 0.5% quarter on quarter instead of the 1.6% annual rate, or 0.4% quarter on quarter rate in the first estimate last month.
Market estimates had been for an improved performance with the contraction coming in at 0.5% instead of the 1.6% first reported.
Japanese economy shrinks more than expected
Business spending was worse than expected, falling 0.4% quarter on quarter instead of the originally reported 0.2% contraction. That was despite solid private investment data for September and the quarter released last week.
Personal consumption data was unchanged at a 0.4% growth rate for the quarter.
The economy has been in a deep sleep since a rise in Japan’s consumption tax on April 1 to 8% from 5%. That saw second quarter GDP fall by an annualised -7.3% (now revised to -6.7%).
But offsetting this surprise was positive news from the country’s current account data for October.
Japan’s current account surplus more than doubled estimates in October, the fourth straight monthly surplus as the weakened yen boosts the value of overseas investment income, and falling oil prices finally have a positive impact (which will continue into November, despite the weakening value of the yen).
The current account produced a surplus of 833 billion yen ($US6.85 billion) in October, versus estimates at 370 billion yen.
A year ago Japan recorded a current account deficit of 154.3 billion yen, so the impact of the weaker yen on the country’s income flows (but not on exports, which remain weak), has been very tangible.
October’s poor trade performance confirms that weakness in exports – Japan’s goods and services trade deficit rose to 983 billion yen, versus a 923 billion red hole in September.
And even though economists say recent economic data suggested growth has returned to the economy in the current quarter, don’t be fooled. The Japanese economy remains weak.
Private consumption, the most important part of the economy, continues to be moribund after the sales tax increase in April and now inflation caused by the yen’s 30% fall against the dollar.
The fall in the yen has yet to boost exports, one of the aims of Prime Minister Abe’s ambitious economic policies, and that unprecedented level of spending by the country’s central bank which is trying to boost the economy out of its deflationary rut.
The continuing weakness in private consumption has seen businesses large and small cut production and capital investment, further undermining economic growth.
The country and the economy seem to be on an ever weakening treadmill, and yet Sunday’s poll will see Prime Minister Abe re-elected – mainly because the opposition parties are so poorly organised and lack leadership.
