The Japanese economy rose from recession, expanding in the second quarter by 0.9% and 3.7% on an annualized basis. Economists had anticipated the GDP figure to have added 1.0% to the nation’s output. Nonetheless, a bit of added relief came as the contraction for the first three months of the year was reevaluated to be far better than originally estimated. Indeed the 3.8% decline in annual output was revised up to only a 3.1% slip. Despite this headlining optimistic news, there may be some reason for concern. A deeper look into the data reveals a private and consumer sector that is still at odds with the overall global economic environment. Domestic demand slipped 0.7% and private demand lost 1.3%. Most of the rise in GDP came on the back of an activist government. Public demand rose 1.2%, following at 4.7% and 2.8% expansion in the previous two quarters. It seems that the market mechanism, which is responsible for long-term and sustained economic growth is simply not functioning in a positive manner. A reliance on government spending to prop the world’s fourth largest economy will only lead to higher fiscal deficits and rising yields which may continue to cripple the private sector.
[B]Market Reaction[/B]
The minutes following the release of the data was marked by sharp buying spree in the U.S. Dollar against the Japanese Yen as the headline figure gave excuse for investors to renew their risk-appetite. But upon further reflection the Yen rose as risk-aversion came over the public once it was realized that most of the economic growth came on the back of government spending and not on private sector demand or investment.
[B]Global Trade Factor[/B]
Speculation that the economy would come out of recession grew sharply after it was revealed that the Asian country saw it’s current account balance surge to a 13-month high on exports. Activity with the world led the country to widen it’s trade balance for the third of the four previous months. Machine orders data, an indicator of production activity, grew by the largest amount in 14 months in the last month of the second quarter. The level of such goods sold abroad leaped 43.8% from the month prior. All of this positive data led many to believe that Japanese GDP would be substantially buoyed by activity abroad.
[B]Bank of Japan[/B]
If the economy had grown organically, the Bank of Japan might not have had to extend its corporate and agency debt-purchasing program to the end of the year. At it’s July 14-15 meeting, the central bank clearly stated that economic conditions had “stopped worsening,” but still, it was imperative that they continue providing liquidity via alternative measures to the banking sector. Some of the board members offered an even greater extension of time for the bank to participate in this liquidity easing mechanism. If the economy is indeed in a genuine growth phase, then why is such a program required?