Japan falls into recession but experts say investors need to look past the short-term noise

17th November 2014

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The Japanese economy has taken analysts by surprise as new numbers show the world’s third largest economy fell into recession between July and the end of September.

Initial figures show the Japanese economy shrank at an annualised rate of 1.6% during the quarter, well below market expectations which had predicted growth of 2.2%. This is the second quarter of negative growth in a row, leaving the nation in recession territory – for the fourth time since the financial crisis

The slowdown in the previous quarter, between April and end of June was widely attributed to a fall in demand for goods and services following a hike in consumption tax (VAT) from 5% to 8% but the slip in the three months to the end of September looks to have been exacerbated by businesses cutting back spending.

Hargreaves Lansdown, head of investment analysis, Richard Troue said: “This latest setback will fuel speculation Prime Minister Abe will postpone by around 18 months a further rise in consumption tax to 10% from 8%, due to take effect next October. It has also been suggested he might call a snap election, though the timing would be questionable as his popularity is currently at a low point.”

However Troue urges that it is important to remember the latest data is merely an initial estimate based on a limited amount of numbers.

The government had previously indicated it would wait until the second estimate of third quarter growth was released on 8 December before making a decision over consumption tax. Japan’s Prime Minister is expected to confirm tomorrow whether he will defer the consumption tax rise and call an early election, possibly on 14 December.

Troue added: “Following the news the yen weakened against the US dollar to its lowest level for around seven years and the Nikkei 225 closed down almost 3%. The stock market and currency could remain volatile until Mr Abe confirms his intentions. There is of course the prospect of further economic stimulus as well.”

The past two years has been a very volatile period for the Japanese market where during 2013 its Nikkei 225 index soared by 27% in sterling terms but year-to-date it is up by just 2% after suffering a heavy fall during the first half of 2014.

Despite the roller-coaster returns Troue advised that “investors should look through the short term economic noise and focus on the long term prospects”.

He said: “Our analysis continues to suggest Japan is one of the cheapest major stock markets in the world and investors should use setbacks such as these to top up their exposure.”

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