World Economy On A Recovery Path – Part II

Japan

The Asian giant is also on a recovery path with the economic activity recovering since the second quarter of 2009. The recovery has been mainly export driven which to a certain degree is a positive news as it indicates that other economies are also experiencing recovery. Industrial production continued to increase for the seventh consecutive month in September registering an increase of 1.4% month on month. However with weaker labour market and not much of corporate profit domestic private demand continues to be weak.

Thanks to fuel and energy prices, inflation in Japan continues to be negative. Annual CPI at -2.2% was unchanged in September. Excluding food and energy annual CPI decreased to -1.0% from -0.9% in August.

There are still challenges abound for the economy. With an export driven growth, Japan is to a large extent dependant on other economies for its growth. Exports are definitely showing an increase but on a year on year basis they are on a decline. Year on year Japanese exports decline by 30.7% in September vis a vis 36% year on year decline in August. The yen’s growing strength can also prove to be a dent to exports by making Japanese goods relatively more expensive than that of other countries.

The low level of domestic consumption is also a cause of concern. Retail sales continues to decline with a drop of 1.4% year on year in September. However this drop is less than what was expected and is the smallest drop in the last 10 months.

On the employment front the unemployment rate marginally declined from 5.5% in August to 5.3% in September. However analysts argue that this drop is only a farce as some 20,000 job seekers in the 20 year age group left the job market. Also employment subsidies given by the government to companies helped to improve employment. Another indicator of employment, the job-offers to seekers ratio also showed a very marginal improvement for the first time in the last two years from 0.42 in august to 0.43 in September.

Against this positive news is the fact that wages declined for the sixteenth consecutive month by 1.6% m-o-m. However this is still an improvement given a decline in wages of 2.7% last month. This trend is expected to continue given that the bonuses are expected to decline by 13% to 15% as per data from the Japanese Business Federation.

The Bank of Japan (BoJ) decided to continue with its limitless lending programme till end of fiscal year in March 2010 to provide support to corporate financing. However the bank decided to phase out the buying of commercial papers and corporate bonds. In its meeting on 30 October 2009, the Bank of Japan decided to keep the uncollateralised overnight call rate unchanged at 0.1%. The bank forecasts the current deflation to continue till 2011. However it feels that the current deflationary tendencies are not likely to exert downward pressure on economic growth. The bank foresees the economy to grow by 2.1% in the fiscal year 2011.

The government in an effort to revive the economy announced that it plans to create 100,000 new jobs by March 2010. The economy is already sitting on a record debt to GDP ratio of 200%. Overall the economy is forecasted to grow by 1.1% in 2010 with 2009 expected to close with a negative growth of 5.6%.

Read more at: World Economy On A Recovery Path – Part I