By: Dr. Mike Campbell
Most analysts were surprised when Japan’s Q3 GDP figure came in at 3.9% since poorer performance had been predicted due to the influence of the high Yen which is perceived as harmful to exports. The better than expected performance was attributed to a domestic spending peak generated by the ending of governmental incentives to by “environmentally friendly” cars and increased demand for tobacco products ahead of an announced tax increase.
Third Quarter data has just been revised upwards to 4.4% because of higher corporate spending levels than had been thought. Whilst this is undoubtedly good news, it does not detract from the fact that Japanese unemployment remains stubbornly high (by Japanese standards) or that prices have continued to fall for the 20th consecutive month. This deflation has the effect of restraining output because domestic consumers put off the purchase of non-essential goods for as long as possible since they know that the price is likely to have fallen in the intervening months.
Despite a recovery against the US Dollar, the Yen remains very strong against the currencies of its major competitors. This means that Japanese exports are expensive in importing markets, making competing products more attractive. Japan has its own very substantial debt problems, in common with all of the major economies. In a bid to breathe life into the economy, Japan has recently approved a further stimulus package worth $61 billion. The Japanese central bank interest rate has been dropped to near zero in a bid to stimulate the economy by providing “cheap” money to business and by encouraging private citizens to spend money since it earns no interest when on deposit. Most analysts are predicting that Q4 growth will be significantly lower than the Q3 figure since export growth has been slowing for the past eight months.