Japanese Economy Contracted In Q4

Figures just released show that the world’s third largest economy, Japan, contracted in the final quarter of 2012 by 0.1%. This is the third successive quarter of contraction, meaning that the nation continues to be in recession. The figures were a disappointment to analysts who had been predicting that Japan would exit recession in Q4, posting an expansion of 0.1% instead.

The new government of Shinzo Abe has said that stimulating the Japanese economy is their top priority. They hope to draw a line under the deflation which has dogged the economy for many years, sapping domestic demand. The Bank of Japan (BOJ) has set a target of 2% for price inflation which is in keeping with similar policies in force at other central banks – except that the BOJ wants to see inflation rise to this level. Deflation subdues domestic demand since consumers delay purchases of expensive items as long as possible, knowing they will be cheaper in the future. The bank has maintained its low interest rate policy (between 0 and 0.1%) as a means to persuade consumers to spend money rather than save it and as a mechanism to provide cheap loans to businesses in the hope of stimulating the economy. The bank avoided pressure to promise that these rates will be maintained until the inflation target is met.

The lacklustre Q4 performance was blamed on weak demand for Japanese goods in importing markets. Demand is likely to improve going forward since the Yen has depreciated significantly against other major currencies which makes Japanese goods more competitive in foreign marketplaces and because there are suggestions that global demand is increasing. A further advantage of the weakening Yen is that it means Japanese profits (made in foreign currencies) are worth more when repatriated to Japan and converted back into Yen. This may mean that businesses have more funds to invest, going forward.