The Nikkei and Topix are marginally in positive territory as of this writing (the Nikkei up a bare five points) retracing earlier gains. The proximate cause appears to be a downbeat revised GDP report. Stocks initially appeared to shrug off the bad news, taking momentum from the Euro/US rally, but upon reflection, have (for the moment) taken a more sober view.
This news is far from unexpected, despite the market reaction. Japan is a bifurcated economy, with a flagging domestic sector and heretofore robust exports. Japan in turn outsources a considerable amount of its exports to China, so the results reflect the plunge in China, which in turn is a function of a plunge in international trade.
From the Financial Times:
Japan’s gross domestic product contracted much more rapidly in the third quarter than initially thought…Revised gross domestic product data released on Tuesday showed a quarter-on-quarter fall of 0.5 per cent for the three months to September, compared with a preliminary estimate issued last month of a 0.1 per cent decline.
On an annualised basis, the third quarter contraction – which put Japan officially into recession – is now estimated at 1.8 per cent, rather than 0.4 per cent as previously….
Analysts also expect further bad news from the Bank of Japan’s Tankan survey of sentiment among manufacturers, which will be released next week.
Analysts surveyed by the Bloomberg and Dow Jones news agencies have predicted that the survey would show the worst deterioration in sentiment in more than 30 years.
Companies are also facing difficulties raising funds through the capital markets, prompting the most rapid rise in bank lending since records became available in 1992.
A representative of the National Federation of Small Business Associations said this week that companies appeared to be rushing to secure funds out of concern latecomers would find it difficult to borrow. ”Many companies are borrowing now because they see no prospect for sales in the new year,” he said.
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This is a blip. We have had a storm of horrible news for 3 months. If Toyota revenues are down 35%, of course Japan is down 2%. What we can’t see is what happens next. If the government bails out the big 3, then we can expect nationalization of the airlines, farms etc. If that happens, and government is holding the bag for the ‘bad economy’, they will need to protect it (Smoot Hawley 2) and pay for it (69% marginal tax rates). Then we will see how bad it can get.