Japan posts a second quarter of contraction, sparking recession fears

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Japan Q2 Highlights

  • Q3 GDP declines -0.4% vs. 0.5% estimates
  • Q2 GDP revised downwards to -1.8% from -1.7% previously
  • Delay of the sales tax hike, due in October 2015 most likely to be delayed
  • Shinzo Abe could possibly confirm rumors of calling for a snap election next month

Asian markets opened soft on Monday weighed down by the disappointing GDP figures from Japan.

The Q3 GDP which was released earlier today came out weaker at -0.4% while the previous quarter’s GDP was revised downwards to -1.8% from -1.7% hinting at a recession looming for the Asian giant. The Japanese economy shrank at an annualized pace of -1 .6% while declining -7.3% in the previous quarter. It also marks two consecutive quarters of economic contraction in the country. Economists had in fact expected the GDP to grow at an annualized pace of 2.1%.

The fear of recession is likely weight in on the political stage as well. Rumors from last week that the Japanese Premier Shinzo Abe was contemplating a snap election in December could possibly come true although there has been no official confirmation as of yet. The disappointing data is also very likely to delay the proposed sales tax hike (or consumption tax) by a further 10%, which is most likely to be announced as early as Tuesday. The sales tax, which was originally at 5%, was hiked to 8% in April this year to reign in the massive public debt with plans to increase it to 10% in October next year.

The calls for a snap election are likely to see Shinzo Abe retain power in an effort to consolidate and strengthen his mandate for reforms as the opposition is still widely seen as being weak and divided. The key however would be to convince the Japanese public that the massive public debt could be controlled while seeking reforms to stimulate growth as well. Shinzo Abe’s primary target was to eliminate the budget deficit by 2020 with a major contribution coming from hiking the sales tax.

The Nikkei 225 benchmark index from Tokyo plunged by over -2.5% at the time of writing after making a yearly highs breaking above 17500 levels. Consequently, the Japanese Yen has also bounced from its 7-year lows against the US Dollar, with the USDJPY making a brief spike to 117 before declining. Most of the Yen crosses which, as of last week enjoyed yearly highs are now seen to be easing back in what looks like a technical retracement ahead of the official confirmation of the snap elections. The Yen had already showed signs of a rally sparked by election rumors last week, reported by local newspapers.

It was only a few weeks ago that the Bank of Japan announced its surprising expansion of monetary stimulus to 80 trillion Yen per year from the previous levels of 60 – 70 trillion Yen in order to bring inflation close to the central bank’s 2% mark.

With the Yen now strengthening, albeit moderately and the Greenback which is looking more likely to make a corrective decline this week, followed up from Friday’s price action, today’s trading session will be interesting, to say the least, especially considering that there isn’t much of news events scheduled for the day.

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