Japan’s Economy Contracts 1.2% Annualized

The Bank of Japan disappointed already glum markets in announcing domestic product data earlier today showing an annualized contraction of 1.2%. Hopes had been for an annual contraction rate of 0.7%. In either case, the Japanese economy’s healthy growth under Prime Minister Koizumi has given way to economic decline under Shinzo Abe. However, the problem is not who leads, but it is structural to the Japanese economy.

For better or worse, the Japanese are a nation of savers. When it comes to consumption, restraint is often a virtue. Yet when one talks of investment, being pennywise is almost by definition pound foolish. The main culprit in the Japanese economic mess is capital expenditure, and the horrendous miscalculation of capex by the BoJ. Preliminary data indicated capex had grown at an annualized rate of 4.9%, but this was revised down to a contraction of 4.8 per cent. That’s quite an error.

And of course, market expectations rested on the former figure. By 11am local time, the Nikkei it was down 340.49 points, or 2.1%, to 15,781.67. That includes a recovery from earlier trading levels. Added to the Wall Street decline from Friday, it’s a bad day of stock trading in Japan.

The BoJ board meets next week to discuss interest rates, and there is almost no chance whatsoever of a rate hike. The yen was a major issue in capex, trading away from the ¥114-115 per US dollar range most companies expected. A rate increase will merely move this too far from where it should be.

All the same, it would be a mistake to use one datum to decide the Japanese economy is in lethal decline. Company profits suggest that things will improve and that, while the 2.1% growth rate officials hoped to achieve won’t happen, growth of some kind is in the cards. The key now is the US subprime mortgage market; and drop in demand for Japanese goods in the US would be what economists call “bad.”

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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