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Consumer Spending, Industrial Growth Steer Japan

by kraju

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Japan’s economy expanded at a slower pace than expected by many analysts this quarter, its GDP grew by 0.6 percent in April to June period, indicating an annualised increase of 2.6 percent, according to latest government figures. Analysts were expecting a growth of 4.1 percent in the first three months of the year. Japan’s Prime Minister has introduced a slew of reforms including the much hyped “Abenomics” which aims to stimulate the money supply to the economy; these measures have weakened the Yen and increased the profits for Japan’s exporters. Its core consumer inflation rose to its highest in five years, while industrial output made a strong comeback and the jobless data fell to its lowest level since 2008. The core consumer price index (CPI) of the world’s third largest economy rose to 0.7 percent in July from a year earlier, hitting its highest since November 2008. In a clear sign of growth its unemployment rate fell to 3.8 percent in July from 3.9 percent in June, it’s lowest since October 2008, while industrial output in the month hit a high of 3.2 percent from the earlier month.  Japan’s policy makers have made a concerted bid to revive the economy which has experienced many ups and downs over the past two decades fighting deflation and consistent bursts of recession.

“Things are improving and it is good to see production improving and the labour market recovering, which means more purchasing power and more stable demand.” Jesper Koll, head of Japanese equity research at JP Morgan Securities in Tokyo”, told CNBC Asia’s Squawk Box.

Household spending data showed spending in the month rising to more than 0.9 percent compared to the earlier month, Japan’s top listed companies doubled their profits, almost all of the Nikkei 225 Stock Average companies reported profits according to a data compiled by Bloomberg. The profits registered by the companies increased by 103 percent and beat analyst estimates by 16 percent, the highest since two years. Japan’s premier Abe’s decision to end stagnation and revive the economy has finally borne fruit with increased household spending, reduced unemployment and corporates stoking the economy through investment and higher wages.

Abenomics revives companies

Companies in Japan are benefitting from the Prime Minister’s economic policies which aim to print more money, weaken the national currency and make their products and services more competitive. Its national currency Yen has dropped to an unprecedented 19 percent and made Japanese cars, auto parts, electric components and home appliances more competitive abroad. Toyota’s cash and marketable securities rose 11 percent to $ 37 billion as of the end of June, the most among non listed financial companies in Japan, according to data compiled by Bloomberg. The automobile major’s earnings were boosted by the weaker yen, it is also paying higher wages to the workers and higher dividends to its shareholders, Japan’s six major car makers registered a whopping total net income of 848 billion yen for the quarter ended June, beating analyst estimates by 14 percent.

No change in monetary stimulus

The Bank of Japan is not expected to change the monetary stimulus launched in April, which will double its monetary base to 270 trillion yen (1.76 trillion pounds) by the end of 2014 to achieve its two percent inflationary target. Although, domestic demand is rising, unemployment numbers going down and companies are registering huge profits there have been other geopolitical risks such as the Syrian conflict and sharp outflows of capital from emerging economies on expectations of the U.S. Federal Reserve’s retreat from bond purchases.

Commenting on the risk of a bigger capital withdrawal from emerging economies, Yoshihisa Morimoto a board member of Bank of Japan said “The global economic recovery remains fragile, so there is huge uncertainty on how a sharp outflow of funds could affect financial markets and global growth”.

The Indian rupee, Indonesian rupiah and the Turkish lira have hit record lows against the U.S. dollar and the investment sentiment has soured on the emerging markets.

International Finance Magazine had carried out an article detailing the risks to emerging economies over the Fed tapering and the risk of capital outflows from emerging economies.

Hike in Sales Tax

Japan’s government has got the nod of a special advisory panel to raise the national sales tax in 2014 as the panel opined that the step would not threaten economic recovery or business confidence if it was coupled with other stimulus. Prime Minister Shinzo Abe had convened the panel to hear a wide range of views to hike the sales tax to ten percent in October 2015.

Finance department officials and analysts say that raising the tax would be an important step in lowering the burden of public debt, which is the worst among industrialized countries and twice the size of the Island country’s economy. Detractors say the increase in sales tax will lower consumption, the 60 member tax advisory panel which included labour union heads and executives from medium sized businesses to Toyota Motor Corp said they would accept the government’s decision if it took some steps to offset the expected dip in consumer spending. When Japan had hiked the sales tax from 3 percent to 5 percent in 1997, consumer spending fell by 13 percent in the quarter it came into effect.

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