Japan shocked investors around the world when they slipped into their 2nd recession since 2012. The third quarter reports were grim since it showed that Japan’s economy was continuing to lose momentum. A series of unfortunate events has been attributed to Japan’s recent slide into recession. The biggest factor in the slowing of the economy had to do with weak business investment. While this is terrible news, it has also played a key part in strengthening the yen. The versatility of the market has been showcased once again, with one countries tragedy helping other aspects of the economy gain momentum.
“This report shows the increasing risk that Japan’s economy will continue its lackluster performance,” said Atsushi Takeda, an economist at Itochu Corp. in Tokyo. “The weakness in capital spending is becoming a bigger concern. Even though their plans are solid, companies aren’t confident about the resilience of economy at home and abroad.”
It’s no secret that the Japanese economy has experienced an extremely grueling year in 2015. For 3 consecutive quarters the economy has been waning which has provoked an unprecedented distrust for investors who were previously eyeing Japan. Most experts agree that the economy’s drop is mainly attributed to frugal business investment along with dropping inventories within Japan. This was compounded by China’s financial disaster which sparked a negative global outlook on investment. All of these factors influenced Japanese companies to hold back on spending & limit production. Even though production is predicted to pick up later this year the latest GDP report is putting an incredible amount of pressure on Abe & Bank of Japan. Its governor Haruhiko Kuroda is fighting tooth and nail to salvage his business amongst growing calls for stimulus packages. The BOJ is holding a meeting next week to try to come up with a plan that will simultaneously revive the economy & promote investment. It’s a tough task to tackle but with the current state of the economy the leaders have been forced to act.
“The BOJ should act now if they are looking at economic fundamentals: prices are falling and economy isn’t growing, giving no sign for inflation expectations to rise,” said Itochu’s Takeda. “As for the question of whether they will act, it’s hard to say.”
While Japan is still reeling from the latest GDP report this development has played a part in the strengthening of the yen. After this shocking report was made public the yen experienced a much needed bump and was already up to 0.1 percent by 11:50 a.m. in Tokyo. Another key factor that’s fueling the rise of the yen is that investors have been purchased the yen in droves following the barbaric terrorist attacks in Paris.
The only real solution that Japan has is introducing a stimulus package that’s big enough to jumpstart the economy. This will increase confidence and allow businesses to quit holding their cards tight while pumping cash into the economy. With the entire global market spiraling into an international rollercoaster ride this will undoubtedly affect the world economy. The world is watching, & the only thing that’s certain is that this will be an incredibly interesting year for Japan.