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The figures ‘surprised’ the market, contracting 1.6% year-on-year, to go with the mass 7.3% contraction in the second quarter. Domestic consumption continues to feel the pinch from the newly introduced consumption tax.
‘Surprise’ maybe stretching things, considering this is Japan’s fourth technical recession in six years. The effects of the consumption tax from April are still dragging domestically and the global slowdown of the last four months just heaped further pressure on the exporting nation.
The recession read now squarely asks the question: is Abenomics a failure? Is it even able to influence the structural issues facing the Japanese economy? The jury remains divided.
However, the response to the GDP figures was obvious - when in doubt, spend your way out.
Within hours of the GDP read, Finance Minister Akira Amari admitted there is a high chance of a stimulus package. This was then backed by one of Shinzo Abe’s closest advisers, Etsuro Honda, who stated that a ¥3 trillion program would be appropriate to stimulate the economy further and that this program should go towards household spending ‘such as childcare’.
That line alone is the clearest indication that Abe is gearing up for a snap election - childcare is always a strong vote winner. Further confirmation will come later today, when Abe holds a press conference. It’s widely expected he will announce the postponement of the next planned increase to the consumption tax rate until October 2017.
Economists estimate this move alone will add 0.3 of a percentage point to Japanese growth, further paving the way for a snap election. Yes, the GDP figure could muddy the outlook for this scenario; Abe’s political opponents, however, are in disarray. This gives him a clear advantage to continue his reform agenda of mass stimulus, fascial flexibility and deregulation.
Spend, spend, spend and less taxation will be cheered by equity markets. Japan isn’t the only nation or fiscal union currently trying to spend its way out of trouble. There are further signs Europe is on the verge of expanding its bond buying program to government bonds. Mario Draghi continued to point to this option in a press conference overnight, much to the delight of the European markets. This cheer is likely to flow through to Asian trade today, with currency markets already beginning to price this scenario in.
However you have to ask: is spending your way to growth the answer? It certainly helps ‘wealth creation’; the last six years has seen mass market rebounds. But has it actually reached the places it was truly needed? Household consumption in most nations (baring the US) is struggling, wage growth the world over is flat-lining and the word to watch for in 2015 is ‘inflation’ or should I say disinflation. Spending your way out can only do so much. Perhaps the market ‘surprise’ will only arrive when the markets begin to question whether asset values are artificially inflated or are indeed real.
Ahead of the Australian Open
We are calling the Australian market up 12 points to 5426. However, the free trade agreement signed at the close of the trade with China last night is likely to have a slight positive effect on cyclical plays that have been decimated over the past eight weeks. One of the clearest winners of the deal is FMG which derives 98% of its earnings from China. Tariff reductions will further improve its cash flow and though I see further pain in iron ore, FMG may see a slight bounce considering it is resting on major support level at $3.