Japan’s Economy Contracts

14 November 2012 1:20:00 PM

By: DailyForex.com

Japan is the world’s third largest economy and a leading exporting nation to the rest of the world. Given that the world economy is slowing and demand is falling, therefore, it is not surprising that an exporting nation would be suffering. Figures just released show that the Japanese economy contracted by 0.9% in Q3 from the previous quarter which equates to an annualised fall in GDP of 3.5%.

China is a major trading partner of Japan and relations (and trade) between the two nations have been strained recently over a long-standing territorial dispute over three islands in the East China Sea. Neither side is willing to back down over their claims to the Senkaku (Japanese)/ Diaoyu Islands which raises the ugly spectre of regional conflict which nobody would want. It is to be hoped that if an amicable tripartite agreement (Taiwan also stakes a claim to the islands) cannot be arrived at that the parties would be open to some form of arbitration by the UN, but this is not on the table currently.

Japan’s woes are also added to by the conception that the Yen is a safe-haven currency. This has meant that investors have bought Yen, pushing its value up against other major currencies, despite the fact that the economic fundamentals do not support this position. The stronger Yen places additional pressure on Japan’s exports, making them more expensive in importing markets; it has risen by 8.5 and 5% against the Euro and US Dollar, respectively, since March 2012. The USA and the Eurozone are key export markets for Japan.

The Bank of Japan is continuing with a series of measures to stimulate the economy and announced that it would pump a further $138 billion into the economy through the purchase of government bonds – this should help to keep long-term borrowing costs down. It has also stated that banks could profit from unlimited loans in an effort to boost domestic consumption which declined by a further 0.5% in Q3.

The Yen cannot continue to defy economic gravity indefinitely, but it may require a shift in investor confidence back to the US and Eurozone to take place first. With serious problems to contend with in Europe and the USA, this will not happen soon, but in the longer run it is inevitable.

Dr. Mike Campbell is a British scientist and freelance writer. Mike got his doctorate in Ghent, Belgium and has worked in Belgium, France, Monaco and Austria since leaving the UK. As a writer, he specialises in business, science, medicine and environmental subjects.

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