Japan in Technical Recession on Release of Disappointing GDP Report

Today saw the release of Japan’s latest GDP report which showed economic growth has decreased at an annual pace of 0.8% in the third quarter.

As domestic demand declined, the Japanese economy contracted in the third quarter as GDP fell 0.2%. Thus, Japan has entered into a technical recession, which is defined as two consecutive quarters of contraction.

Capital expenditure fell by 1.3%, much higher than the forecasted 0.4%.  However, private consumption, accounting for 60% of Japan’s GDP, increased by 0.5%.

Although disappointing, this economic data did not come as a surprise for officials at the Bank of Japan (BoJ). In addition, government officials maintain a cautiously optimistic view that the economy will go on to experience moderate improvements over the long-term.

Speaking after the GDP release, Economics Minister Akira Amari states, “"While there are risks such as overseas developments, we expect the economy to head toward a moderate recovery thanks to the effect of various (stimulus) steps taken so far.”

Minister Akira Amari continues, “Weakness is apparent in some areas, but corporate profits are at record highs and the employment and wage environment is improving. The gentle recovery in the economy is continuing.”

A Matter of Time before the Yen Starts Weakening Again - Swissquote

Swissquote notes, “All in all, Japan is struggling to convince investors that its economy is wealthy and that it remains a good investment on the medium to long-term.

“Until now, the yen has been able to hold ground against most currencies, thanks to Governor Kuroda who is providing continuous support to the Japanese currency through overly optimistic comments. However, we believe that this situation cannot last much longer and the BoJ will have to increase the size of its quantitative and qualitative easing programs in the coming months.

“The central bank has already revised its inflation forecast, postponing its 2% inflation target date by six months - to between October 2016 and March 2017. From our standpoint, it is just a matter of time before the Japanese yen starts weakening again, especially against the US dollar, as the monetary policy divergence will accentuate the yen’s debasement. Everybody is waiting on the Fed, the BoJ is no exception.”

Later this week, we still await the Bank of Japan’s monetary policy decision. The Bank of Japan Governor Haruhiko Kuroda’s press conference will also be closely watched.