Concerns have been raised as Japan’s latest economic data shows that inflation has slowed for a third consecutive month, amid fears that the country will slip back into recession for the third time in four years.
In the last two years, Japan has implemented sweeping reforms, consisting of monetary, fiscal and economic growth strategies, introduced to cut the GDP debt and to encourage private investment. These reforms have had mixed success. Yes, Japan has come out of deflation for the first time in more than 15 years, but the initial fiscal stimulus are now fading and the 3% sales tax increase that was implemented in April is hitting consumers hard.
Many commentators believe that with a large government debt to GDP ratio and a population that is both ageing and declining, the economic outlook for Japan looks bleak. But this is not the view held by all and indeed for some, such as Japanese exporters, there have been many positives as a result of the policy changes.
Whilst many of the reforms have failed to come to fruition, Prime Minister Shinzo Abe’s adoption of new measures to boost export revenues via the introduction of monetary stimulus has been successful. These stimuli have led to a significant depreciation in the yen, which has in turn raised exports levels and increased profitability. This is because domestic companies have been able to price their products abroad more competitively, with the yen being down by almost 10% against the U.S. dollar since the start of the year, resulting in the subsequent overseas sales being higher when converted back into local currency terms.
Indeed, Japanese exports for October grew at their fastest pace for eight months, with a 9.6% rise that was more than double the predicted gain of 4.5% – taking the export rate to its highest level since 2008.
This rise is largely due to an increase in the shipment of cars, ships and electronics, with a marked increase being recorded in exports to Asia and the United States. Although exports to China slowed during the same period, hopes have been raised that the Government’s cheap-yen policy will eventually lead to improved economic growth.
A Japanese fall back into a recession would arguably affect the rest of the world, especially those European economies which are already weak. Whilst not influential in its entirety, a strategy which focuses on the continued growth of exports could provide some much needed fiscal relief for the Japanese economy.
There are serious economic constraints which may push Japan’s economy back into recession, but the development of its growth export strategy must be viewed as a welcome indication that global demand could hold the key to helping the country with its recovery.
