Japan released third-quarter GDP figures today, revealing the fastest pace of contraction in the Japanese economy since the devastating earthquake that took a heavy toll in April of 2011.GDP contracted 0.9 per cent in the third quarter, or 3.5 per cent annualized. The biggest contributions to the drop in GDP were exports (-5 per cent) and capital expenditure (-3.2 per cent). Domestic consumption also fell 0.4 per cent after a government subsidy for purchasing eco-cars expired, leading to a drop in auto sales.
The auto sector – which comprises the biggest share of Japanese exports – provides a good example of the troubles facing the Japanese economy.
Fiscal policy – including the expiration of the eco-car subsidy – is partly to blame for the weakness in the auto sector and the wider domestic economy.
However, given that exports led the contraction in GDP, the dollar-yen exchange rate has been invoked by analysts as a source of the problem.
The yen is too high, they say, which makes Japanese auto exports too expensive for prospective international consumers.
Toyota announced last week that it would outsource production of a line of cars to a Mazda plant in Mexico and followed it up with a similar announcement today about ramping up production in Indonesia.
Societe Generale currency strategist Kit Juckes found the Toyota news rather striking, and chalked it up in part to the strong yen:
Japan’s falling GDP and weak exports made morning headlines. I was struck by the news that Toyota is going to increase production in Indonesia, as it reflects a trend. The world’s biggest car manufacturer is increasing non-Japanese production, which is no surprise.
That China is no longer the destination of choice reflects both rising Chinese labour cost and political tensions which have wreaked havoc with Japanese exports to China.
The bottom line – Japanese exporters are facing challenges from multiple directions. Life would be much easier if [USD/JPY] were allowed to go up. That’s not going to happen soon, but it will happen in due course.
Citi analyst Mark Fielding and his team made similar comments, writing in a note to clients, “Toyota is also likely to benefit by shifting production of subcompact cars, which are not profitable as exports from Japan at today’s exchange rates, to Mexico.”
The Bank of Japan has been trying to weaken the yen for a long time, and to little effect.
However, given the latest deterioration in economic data, BofA economist Masayuki Kichikawa expects the central bank to up its efforts:
More specifically, it is highly likely that: (1) the BoJ will ease its monetary policy further very soon (in December or January); and (2) the government, whether DPJ-led or LDP-led, will put together another supplementary budget very early next year (it will probably pass it through the Diet at the beginning of the ordinary session, which is likely to be convened late January).
Kichikawa says that will set up a “tug-of-war” in 2013 for the Japanese economy between the negative impacts of continued weak external demand for Japanese products and the positive effects of monetary stimulus.
BoJ Governor Masaaki Shirakawa affirmed the central bank’s policy stance today, saying the BoJ would continue to confront markets with a lot more monetary easing. Per Reuters:
“We are always watching with great interest how currency moves could affect the economy and prices,” Shirakawa said at a seminar on Monday, warning that yen rises can undermine the economy by hurting exports and business sentiment.
But Shirakawa warned that there was no clear relationship seen between the size of the monetary base and exchange-rate moves, countering views held by some lawmakers and analysts that the BOJ could weaken the yen by pumping money into the economy more aggressively.
It’s unclear whether the BoJ will win out and lift the stagnant Japanese economy, but they are slated to keep trying, nonetheless.
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