By: Dr. Mike Campbell

The deal thrashed out between the leaders of the EU and the banking sector on Wednesday is still sending shock-waves of euphoria through global markets and is boosting banking shares around the world. Time will tell if the EU leaders can deliver on the deal and if it will draw a line (for now) under the European sovereign debt crisis, but it is not the only cloud in the economic heavens.

Japan has had a very difficult time this year. The country fell back into recession at the end of Q1 and then suffered a devastating earthquake an tsunami which claimed more than 20000 lives and destroyed billions of dollars worth of infrastructure. Reconstruction and clean-up from the tsunami is a slow business and the economic stimulus to national growth that was expected to result has yet to be seen.

Japan is a country that lives or dies by its exports with the rest of the world. Rightly or wrongly, the Yen has been seen as a safe haven currency since the onset of the global financial crisis. This has pushed the Yen to record highs against the US Dollar and forced up the prices of Japanese products in importing markets. The manufacturers are left with a dilemma: pass on the currency appreciation costs to the consumer and price themselves out of the market; or absorb part of the costs in the shape of reduced profit margins.

Fresh data emerging from Japan reveals that both household expenditure and factory output fell in September. Factory output for the month was down by 4% on the August figure whilst household expenditure declined 1.9% year-on-year in September. Japanese manufacturing output has also been affected by flooding at overseas production facilities in Thailand which led to all nine overseas car production facilities in the country stopping production.

And if all that wasn’t enough, Japan has debts of $8.6 trillion which will need to be addressed sooner or later. If global confidence in Japan’s ability to service its debts is dented, Japan could be standing over an abyss.