Japanese Economic Update – 17 November 2014
Japan slips into recession in the Q3; pressure upon Shinzo Abe increases as GDP figures prove a game changer for the Japan play
Global equity markets fell at the open on Monday, with the NIKKEI sustaining the heaviest losses, when Japanese GDP data showed the economy slipping into recession during the third quarter.
In detail, the Japanese economy shrank by -0.4% on a quarter on quarter basis and -1.6% on an annualised basis.
The surprise contraction follows six months of weak consumption and lower than expected export demand as the Japanese economy battled against the effects of an earlier increase in consumption taxes and an uncertain external environment.
There has been much speculation over recent months as to whether or not the weaker state of the economy will force the Japanese government to abandon a second increase in consumption taxes that has been widely expected to go ahead next October.
While the jury remains out for the time being on whether or not the government will choose to delay the increase, what is certain is that pressure has now increased upon Prime Minister Shinzo Abe’s cabinet from all sides.
With inflation artificially rising and real incomes still falling, concerns over whether or not the economy will be able to whether another increase in taxes are understandable.
At the same time, but on the other hand, Japan has the developed world’s largest sovereign debt pile to contend with and without a further increase in government revenue; the cabinet would be hard pressed to meaningfully reduce this in future years.
Given the stakes of some of the choices at hand, and the fact that there is no easy way out for the government or the economy; many Asian news outlets have reported that the Prime Minister is likely to force a general election before year end in order to seek re-approval of his leadership from the public.
The timing of the Japanese budget, which is to be delivered in January for implementation in April, is believed to be a critical consideration in the likely moves of the Prime Minister.
Reports released by the Japanese news broadcaster, NIKKEI, suggest that the government could choose to announce a delay to further tax increases as early as this week in order to shore up public support ahead of a December general election.
Our view on this is that the prospect of losing momentum behind efforts at reform, or shying away from an odorous but necessary dose of medicine, is likely to prove an unattractive option for the Prime Minister.
For this reason we believe it is more likely that the Prime Minister will announce further fiscal stimulus measures before confirming that the additional increase in taxes is to go ahead. While a general election would be likely to follow this, it is not possible to predict what the outcome would be for the nation or the economy.
Looking ahead, and in relation to markets; one thing that is for certain is that the weeks leading up to Christmas will most probably be overshadowed by a cloud of uncertainty and potentially, a sense of foreboding among investors. This has the potential to cause a reversal of recent gains for the NIKKEI and the wider Japanese market.
Consequently, the risks surrounding investors in Japanese equities have increased markedly this morning.
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