Japan unexpectedly slipped into a recession at the end of the previous year 2023. This event marked two consecutive quarters of contraction and leading to doubts about the central bank's exit from its long-standing ultra-loose monetary policy. The country's gross domestic product (GDP) fell by an annualized 0.4% in the October-December period, contrary to market expectations for a 1.4% increase. Weak demand in China, sluggish consumption, and production halts at a Toyota unit contribute to a challenging economic recovery. Private consumption, representing over half of economic activity, fell by 0.2%, while capital expenditure dropped by 0.1%. The ongoing frailty in consumption and capital expenditure, essential for domestic demand, stands as a significant concern for the economy's momentum to excel out of recession.
Some analysts are pushing back expectations of an early exit from negative interest rates, citing the difficulty in justifying rate hikes amid the economic downturn. Japan's nominal GDP for 2023 fell below Germany's, making it the world's fourth-largest economy. Despite the economic challenges, the Nikkei stock average rallied to 34-year highs, with traders pushing back bets on an early BOJ policy shift. Yields on Japanese government bonds fell. The challenging economic landscape and doubts about policy shifts have led to caution in the financial markets, with a potential impact on the Bank of Japan's plans for policy adjustments.
Because of this downslope in the economy, German had a chance to stand out and became the 3rd biggest economy globally. With a GDP of $4.5 trillion, Germany now sits behind the United States and China in terms of economic heft, and narrowly leads Japan, which has a GDP of $4.2 trillion. The last time Germany held the number three spot was in 2007, before it was overtaken by China.
I am interested to see the GDP capital per person of Germany and Japan as I feel this gives a fair assessment of overall socio-economic well-being. Just because a countries GDP or economic activity falls, it does not neccessarily mean that individuals are doing poorly.
ReplyDeleteIt is true that GDP does not capture the whole socio-economic picture to rank countries' economic system. In October 2023, Germany is projected at $52,824 compared with $33,950 in Japan for GDP per capita.
DeleteHowever, GDP is popularly used to estimate the size of a country’s economy and its impact on the global economy. Germany was doing slightly better and also because of the weak Japanese yen recently. From mid 2022, yen went from 110jpy to 1 usd, to around 150jpy to usd. Hence, the economy went from over 5trillion to 4.2 trillion in the span of a few months). To explain why the yen is weak now, mainly because Japan's central bank is keeping interest rates at rock-bottom levels while the Federal Reserve and other central banks have been on a hiking cycle.
https://www.japantimes.co.jp/commentary/2024/01/11/japan/weak-yen-japan-economy/
DeleteDespite Japan slipping into recession, why did the Nikkei stock average rally to 34-year highs, and what implications does this have for policy adjustments by the Bank of Japan? Additionally, how did Germany capitalize on Japan's economic downturn to become the world's third-largest economy, and what are the implications of this shift in global economic rankings?
ReplyDeleteHi Zoran,
ReplyDeleteI would like to answer your questions on the Nikkei stock market based on my understanding of this article "Nikkei parties like it's 1989; hits record high" (Reuters, https://www.reuters.com/markets/asia/nikkei-parties-like-its-1989-scales-record-high-2024-02-22/#:~:text=Corporate%20governance%20changes%20in%20Japan,the%20spotlight%20on%20attractive%20valuations.)
The Nikkei stock average rallied to 34-year highs despite Japan slipping into recession for several reasons:
Cheap Valuations and Corporate Reforms: cheap valuations and corporate reforms in Japan are attracting foreign money. Investors are switching from Chinese markets towards Japanese stocks.
Trade Exposure and Weak Currency: The Nikkei's rally has been insulated from deteriorating domestic demand due to its trade exposure. A weak currency has also boosted exporters' earnings, contributing to the stock market's resilience.
Corporate Governance Changes: Corporate governance changes in Japan, including buybacks and unwinding cross-holdings, are driving positive sentiment.
Foreign Investments: Foreign investors poured significant funds into the Japanese equity market, with 6.3 trillion yen ($42 billion) in equity market investments last year. In January alone, foreign investors spent a net 1.16 trillion yen in Japanese equities.
Robust Earnings Season and Falling Yen: A robust earnings season, coupled with a falling yen (which is back near 150 per dollar level), has contributed to the market's strength.
Sector Preferences: Fund managers are pushing towards semiconductor and bank stocks in Japan, indicating sector-specific preferences that are driving the market's rally.
Comparative Valuations: Compared to the bubble era of the 1980s, the current Japanese stock market is considered reasonable. The forward price-to-earnings ratio for the Nikkei is 20.5, lower than the Nasdaq and comparable to the S&P 500.
Strong Corporate Reform Push: strong corporate reform push from the Tokyo Stock Exchange, with companies improving capital efficiency through share buybacks and unwinding unproductive cross-shareholdings.