Japanese Yen: Japan Growth Beats U.S., But For How Long?

Japanese Yen: Japan Growth Beats U.S., But For How Long?

by Richard Lee

According to the most recent report on Japanese growth, expansion is well on its way for the world’s second largest economy. The tip has helped the yen currency this week, trading up to as high as 94.00 against the US dollar from last week’s low of 97.78. However, is this wave of new growth sustainable? Or are the statistics overshadowing a still weakened economy? Taking a look at the report, it seems that the recent and rather large economic cash handout (along with broader economic stimulus) may be contributing heavily to the recent strength. This point alone could have greater implications for the Japanese yen.

Rapid Recovery

For the second quarter, the Japanese economy has beaten the world’s largest economy to the punch. In the three months of the quarter, Japan has added an annualized equivalent of 3.7 percent on a preliminary basis. The figure has outpaced economic expansion in the US, now pitted at a mild 1 percent contraction and is an improvement from the downturn seen earlier this year. For the record, the Japanese economy was actually anticipated to shrink by a whopping 15.2 percent. But where did this growth come from? Several key sectors looked to have contributed.

Exports – With a recovery hiccup, global consumption of Japanese made goods actually rose during the three month period, improving to over 6 percent for the quarter on quarter. Incidentally, improvements were largely linked to Chinese demand for Japanese goods. The development added heavily to the overall figure as the country continues to remain export growth dependant.

Public and Private Consumption – With credit a bit eased in the country, businesses have increased their short term consumption of capital, although not increasing their longer term investment options. Additionally, cash handouts by the current administration have helped spur some public improvements as policy heads set aside $21 billion in stimulus over the last couple of months.

Limited Exposure – Comparatively speaking, Japanese banks seemed to have been somewhat sheltered by the current crisis as financiers saw the damaging initial effects of leveraged balance sheets a few years ago. As a result, since then banks have cleaned up their holdings while minimizing their exposure.

A Deeper Look

However, given all the good vibes, the underlying Japanese strength may not be as sustainable as one would hope for. Specifically, sector data continues to show a slowdown, if not a complete stalling, of corporate investment for the country. Businesses that don’t expand, won’t spend the money or effort to spend on new factories, labor or equipment. The sentiment is reflected in the fact that corporate owners continue to remain weary of a V shaped recovery, believing more in the L shaped counter. Moreover, consumption is still trickling in. According to the most recent retail sales report, domestic spending has declined for the 10^th straight month – falling by 3 percent. The figure was increasingly disappointing when considering the government has implemented $277 billion in economic stimulus over the last 12 months. Ultimately, things aren’t expected to improve with estimates still pointing to a post war record match of 5.5 percent in unemployment for the land of the rising sun.

A Single Caveat

The only shimmer of hope is expected to surface from the upcoming elections. Currently, the nation is being ruled by the reigning LDP (Liberal Democratic Party) through Prime Minister Taro Aso. As a result, under the recently passed recovery packages, cash injections are expected to wind down by next year. However, given the disapproval ratings of Aso, focus is turning to the policy platform of competitor and DPJ (Democratic Party of Japan) leader Yukio Hatoyama. Should the candidate be newly elected, expectations remain that the current program will continue along with further aid being provided in the form of generous individual allowances and tax cuts.

Shimmer of Hope: Is This The End?

Yen Implications

So what does this all mean for the Japanese currency? Given the underlying weakness in the economy, it is safe to say that continued economic softness is expected to contribute to broader yen selling. Incidentally, throughout the last decade, traders have sold off the currency in comparison to the US economy and not solely on one region’s results. If Japanese data remained weak, the US dollar would strengthen and vice versa. As a result, additionally taking into consideration the global market’s current run up, yen bulls may be in for a bumpy ride heading into the fourth quarter. However, should US economic data take a turn for the worse, the notion that Japanese economic weakness may be overshadowed will likely take a back seat

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