Special Commentary

How Steep Is The Japan Slowdown?

Wed, Sep 1 2010, 18:24 GMT
by Scott Anderson - Wells Fargo Investments, LLC | View company's profile

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Executive Summary

Japan’s economic performance was generally stronger than most analysts anticipated in the first quarter of 2010 as strong regional growth helped produce a robust export driven expansion, but growth slowed markedly in the second quarter, raising concerns about a double-dip recession. The second half of 2010 and 2011 looks to be an increasingly challenging time for the country’s economy and for the country’s policymakers. A GDP growth slowdown in China and the United States will combine with a stronger yen to temper the advance of Japan’s exports and production. At the same time, fiscal stimulus pumped into the economy in 2009 and 2010 that helped to bolster Japanese consumer spending will swiftly fade from view over the forecast horizon. This sets one of the world’s largest economies up for a stark deterioration in growth in 2011 at a time when the Japanese economy is still struggling with deflationary forces. The policy response in Japan is increasingly important, but also increasingly difficult given the high government debt levels and seemingly unending need for additional monetary and fiscal pump priming.

A Second Quarter Growth Surprise
We were anticipating a swift slowdown in Japanese growth in the second quarter, but it turns out we were not pessimistic enough. Japanese GDP rose a paltry 0.4 percent at an annualized rate in the second quarter (Figure 1). A huge letdown following the 4.4 percent annualized growth posted in the first quarter. Moreover, GDP data were revised down for past quarters by about half a percentage point from the third quarter of 2009 through the first quarter of 2010. Japan’s GDP is now just 2.0 percent higher than a year ago, compared to our estimate of 3.1 percent prior to the second quarter GDP release. If the advance second quarter Japanese GDP estimates are to be believed, domestic demand completely shut down in the second quarter. Indeed, domestic spending actually fell 0.9 percent on an annualized basis. Consumer spending was nearly flat in real terms in the second quarter, rising a stark 0.1 percent annualized from the first quarter. Residential investment plunged 5.0 percent on an annualized basis, and is 10.5 percent lower than a year ago. Public investment offered no support either, dropping at a 12.9 percent annualized pace in the second quarter. If not for solid export growth in the second quarter of 25.9 percent annualized, the Japanese economy would have moved back into recession. Deflation remains firmly entrenched, with the GDP deflator falling 1.8 percent from a year ago (Figure 2). Given the poor domestic performance of Japan’s economy in the second quarter, there are real concerns surrounding the viability of Japan’s economic rebound in a slowing export environment without additional fiscal and monetary stimulus.

A Strong Yen Could not Have Come at a Worse Time
A strong yen is swiftly becoming a policy problem for Japanese authorities trying to revive Japan’s economic growth engine, even though for now the Bank of Japan (BoJ) is putting on a brave face, downplaying the impact of the yen on the Japanese economy and its need to intervene in the currency markets or with further interest rate cuts.1 Just as Japan, Inc., was ramping up production and exports to feed growing global and regional demand, a strong yen now threatens to cut Japan’s economic recovery off at the knees, before it has really had a chance to put down roots. The yen recently hit a 15-year high against the U.S. dollar, posing a significant risk to exports and the economy (Figure 3). The impact of a stronger yen will first begin to show up on corporate earnings reports as it cuts into Japanese exporters’ profit margins and their ability to sell abroad. Recent signs of shaky growth in the United States and a marked deceleration in Chinese imports and PMI sentiment surveys suggest that the downside risks for Japan are intensifying. Risk aversion abroad often comes home to roost in Japan as a stronger yen and lower long-term Japanese interest rates (Figure 4). The yen has appreciated 9.0 percent against the U.S. dollar over the past three months and the benchmark 10-year government bond yield is lurking near seven-year lows of around 1.0 percent.

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Published On Wed, Sep 1 2010, 18:26 GMT

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Wells Fargo Investments, LLC

https://www.wellsfargo.com/

sam.bullard@wachovia.com

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For example, you place an order to sell stock you own at a stop limit of $67. If the stock drops to $67 or less, the trade becomes a limit order and your trade will only be executed at $67 or better. Glossary All or None (AON) A stipulation of a buy or sell order which instructs the broker to either fill the whole order or don't fill it at all; but in the latter case, don't cancel it, as the broker would if the order were filled or killed. Day Order A buy or sell order that automatically expires if it is not executed during that trading session. Fill or Kill An order placed that must immediately be filled in its entirety or, if this is not possible, totally canceled. Good Til Canceled (GTC) An order to buy or sell which remains in effect until it is either executed or canceled (WellsTrade® accounts have set a limit of 60 days, after which we will automatically cancel the order). Immediate or Cancel An order condition that requires all or part of an order to be executed immediately. 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There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. 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