Japan’s Recovery Gathers Pace

Japan is currently the world’s third largest economy. Much of the nation’s economic strength stems from global demand for its export goods. However, demand for Japanese products has been under pressure because of weak global demand, a factor exacerbated by the recent strength of the Yen. The Yen appreciated to record levels against other currencies during the global financial crisis since it was perceived as a safe haven currency – it was pushed still higher by the European sovereign debt crisis which also stymied European demand for Japanese products. The Yen remained high despite the catastrophic earthquake and subsequent tsunami of March 2011.

Following (and indeed in the run up to the election) the transition of power to Shinzo Abe, the fortunes of the Yen have changed dramatically. It has fallen by 22% against the Dollar since early November and by 23% against the Euro. The underlying reason for this is Abe’s determination to stimulate the economy by pumping money into it via the Bank of Japan and targeting inflation of 2% to end years of price stagnation and deflation. The consequences of this have been a surge in the Nikkei index which has gained more than 40% in the same period. Investors who still have significant Yen holdings must be considering converting them to other currencies as the Yen continues to weaken, reversing their gains; a significant exodus of such funds will accelerate the decline, of course.

The latest quarterly growth figures for Japan show that the economy grew by 0.9% between January and March, equating to an annualised growth figure of 3.5%. America grew by 2.5% in Q1 and the economy of the Eurozone contracted by 0.9%.Despite the positive data, japan is still beset with relatively high unemployment; the worst public debt mountain of any industrialised nation; an aging population which brings with it diminishing tax revenues and increasing pension and social security costs. Business investment fell by 0.7% in Q1 which does not bode well for a sustained recovery; analysts had hoped to see an increase.