IMF: "Eurozone has a 40% chance of heading into a third recession"

Japan still remains optimistic about the current recovery. Recently, this optimism has been criticised as Japan is unlikely to meet the 2% target inflation rate by April 2015. However, recent data released has been relatively mixed and suggests that the effect of the sales tax hike is starting to wear off. The core machinery orders (Actual: 4.7%, Forecast: 3.5%, Previous: 1.1%, 10/10/2014), household spending y/y (Actual: -4.7%, Forecast: -3.5%, Previous: -5.9%, 30/09/2014) and retail sales y/y (Actual: 1.2%, Forecast: 0.4%, Previous: 0.6%%, 30/09/2014), have beaten forecasts which partially justifies their optimism. However, more positive data will be required for the Bank of Japan to fully justify its optimism about the current recovery.

In order to meet this deadline additional easing will be required. Haruhiko Kuroda has mentioned that the Bank of Japan has many financial tools to help this situation, should it get worse. One financial tool that could be used would be to tap into the Japanese Government Bond market. This would be like a QE style initiative where the BoJ would be buying JGB’s. The majority of the BoJ committee members want the 2-year deadline to be scrapped as it sets a definite deadline for investors expecting Japan to reach the 2% benchmark. If the BoJ passes this deadline there could be devastating consequences on both the Tokyo Stock Exchange and the Yen as capital flight may be induced which will cause less demand for stock in Japan and in the Yen respectively. Furthermore, the BoJ credibility will be questioned as it would not able to meet this deadline and using more easing to meet the target may mean a lack of structural reforms. This credibility could be further questioned by the divergence in the BoJ committee about scrapping the 2-year deadline. The third ‘arrow’, the supply-side policies, issued by the Prime Minister of Japan, Shinzō Abe, has failed to deliver. Therefore, structural reforms may be the key to meeting the inflation target and unlocking growth.

Divergence between Mario Draghi and Wolfgang Schӓeuble (Finance Minister of Germany) has caused further uncertainty in European and global markets. Draghi wants a looser monetary stance, likely to be QE, to help revive the recovery, whereas Schӓeuble wants more budgetary discipline. This uncertainty has been further worsened by the IMF stating that there is a 40% chance of a third recession in the Eurozone, which is deteriorating on a daily basis. This has been stressed by Draghi in his speeches about structural reforms. If local governments don’t act soon on structural reforms this could be devastating to the recovery. These structural reforms have become so crucial that the Eurogroup head, Jeroen Dijsselbloem, has announced incentives for local governments to make structural reforms. If local governments make these reforms they will be given access to cheap European funds and be given leeway on budget deficit targets. These incentives along with the structural reforms will help companies to remain competitive, therefore attracting investors.