Is Ja­pan’s re­ces­sion good for Amer­ica?

Financial Mirror (Cyprus) - - FRONT PAGE -

Ja­pan has slumped back into re­ces­sion, a trend that has re­peated it­self off and on for years. Its gross do­mes­tic prod­uct (GDP) fell 1.6% on an an­nu­alised ba­sis in the third quar­ter. That fol­lowed a sick­en­ing drop of 7.3% on the same ba­sis in the sec­ond quar­ter. Is it pos­si­ble that a re­ces­sion in one of the world’s largest economies can help another? Yes, at least in part.

The most ob­vi­ous and least so­phis­ti­cated view of the re­la­tion­ship be­tween Ja­pan’s re­ces­sion and U.S. GDP is that the de­mand for en­ergy in a trou­bled econ­omy is likely lower than in one that is thriv­ing. Ja­pan’s prob­lems are am­pli­fied in the global econ­omy by deep re­cov­ery trou­bles in the Euro­pean Union and an ap­par­ent drop in growth in China. Among the first ef­fects of the news from Ja­pan was another drop in oil prices, which fell another 1% to less than $75. This fall has un­doubt­edly be­gun to do won­ders for U.S. con­sumer spend­ing as re­tail sales reach the crit­i­cal fourth quar­ter. Com­pa­nies that rely on low fuel and petro­chem­i­cal prices for much of their mar­gins also get helped.

The ef­fects of re­ces­sion on the value of the yen are not as clear. The Bank of Ja­pan has been end­lessly of­fer­ing its own ver­sions of stim­u­lus on the same the­ory as that of the U.S. Fed­eral Re­serve. Liq­uid­ity even­tu­ally will cre­ate a heart­beat in even the most crit­i­cally in­jured pa­tient. The ac­tiv­ity helps the prof­its of large Ja­panese com­pa­nies rise as the value of the ex­change rate su­per-charges earn­ings. As a tan­gent, any U.S. in­vest­ment in a surg­ing Ja­pan stock mar­ket has been par­tic­u­larly good, as the Bank of Ja­pan ac­tion had helped drive the stock mar­ket there to mul­ti­year highs.

Ac­cord­ing to Bloomberg, “as the earn­ings sea­son winds down in Ja­pan - almost all com­pa­nies will have re­ported re­sults by next week - ex­porters are emerg­ing as one of the big­gest ben­e­fi­cia­ries of Prime Min­is­ter Shinzo Abe’s eco­nomic poli­cies. For in­vestors, the weaker cur­rency is out­weigh­ing slumps in wages and lo­cal con­sump­tion, prompt­ing them to push up the Nikkei 225 Stock Av­er­age to lev­els last seen seven years ago.”

The other side of the yen equa­tion, par­tic­u­larly as it re­lated to the dol­lar, is that the cur­rent value of the Ja­panese cur­rency hurts U.S. cor­po­rate prof­its, to the ex­tent to which th­ese com­pa­nies do business in Ja­pan. On the other hand, U.S. com­pa­nies that sell goods and ser­vices to Ja­panese ones at least get an in­crease in de­mand, even if the ef­fect of cur­rency is against those of the Amer­i­can firms.

The trade-off be­tween cur­rency value and en­ergy prices as Ja­pan’s econ­omy shrinks is far too sim­plis­tic to make a case about the coun­try’s re­ces­sion and the Amer­i­can econ­omy. At least it can be said the line be­tween low oil prices and con­sumer pros­per­ity is not am­bigu­ous.

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