Will It Be Different This Time?
11/24/2014 12:01 am EST
With the new signs that the Japanese's economy was again weakening, MoneyShow's Jim Jubak wonders if the BOJ can finally keep their economy on the right track.
Japan is a story that never gets old. For the last 20 years, as Japan has tried to drag itself out of slow growth and deflation, they've pursued this pattern of every time the government stimulates and the economy starts to rev up, the government then does something to tighten, and we've seen exactly the same thing happen in the last year with the government of Prime Minister Shinzo Abe.
The first thing they did was to go ahead and try to weaken the yen, do a lot of asset purchases from the Bank of Japan that got inflation up climbing toward maybe 1% it looked it. It actually pushed Japan into positive growth and then, last March/April, the government, which runs a huge deficit, doesn't balance its budget at all, and also has a huge accumulated debt, decided that they were going to demonstrate their fiscal responsibility by raising the national sales tax from 5% to 8%.
Predictably, what happened, the economy crashed. Second quarter of 2014, the economy contracted by an annualized 7.3%. Third quarter, that's the quarter that ended at the end of September, we saw better performance but, still, contraction in the economy so Japan is now officially back in recession.
What's going on now is that the government is going, “Oh my god, oh my god, what have we done?” And, now, you're going to get an overreaction on the other side, which is why the market is so excited right now where the last middle days of November, the 18th, for example, the Nikkei went up about 2.3% on news that the government was going to postpone the second half of the sales tax increase, which was supposed to go into effect in October 2015, push it out into maybe 2017, going to call a snap election to try to build a mandate for pushing it off, and everybody is now expecting that the Bank of Japan will actually do more to stimulate the economy.
What we're seeing is the yen down at $117 and it looks like it's going to go to $120, $125, Japanese exporters doing really well. Toyota basically announced raised guidance for the rest of the fiscal year. Small Japanese companies really hurting because they're having trouble, since they don't export a whole lot and the Japanese domestic economy is not growing, and they're facing rising costs for inputs like oil and the Japanese consumer is not really happy because while incomes haven't been going up and you've now go so much inflation so they're getting squeezed but, basically, we're back from the market's point of view, we're back toward everybody recognize that we've to stimulate, we've got to weaken the yen, and that's going to be good for the Japanese stock market, especially big cap exporters, at least for a few more months.