Thursday, 14 February 2013

Japan's economy contracts again, may face fiscal crisis

Economic data on Wednesday were positive.

US retail sales rose 0.1 percent in January, the third consecutive increase.

Eurozone industrial production rose 0.7 percent in December, reversing the 0.7 percent decline in November.

And as I reported yesterday, Japan's tertiary industry index rose 1.4 percent in December.

However, today brought news that Japan's economy shrank in the fourth quarter, contracting by 0.1 percent. It was the third consecutive quarterly contraction and is likely to reinforce the government's eagerness to boost economic stimulus.

Indeed, a Business Insider post on Wednesday quoted BNP Paribas economist Ryutaro Kono as saying:

[W]e think monetisation will be the choice of the Japanese government and are making it our base-case scenario... In addition to the large fiscal stimulus package just announced (2% of GDP), we expect the government to implement stimulus measures of a similar magnitude in Q1 2014 and again in Q2 2015... the economy will continue to outperform its trend growth rate (roughly 0.25%)... risk-asset prices will likely continue to rally. The economy, in other words, will take on bubble-like aspects.

While there is likely to be near-term improvement in the economy and asset prices, longer-term consequences are likely to be negative.

With the frictional unemployment rate at around 3.5% and the current unemployment rate at 4.2%, there is actually not much slack left in the economy... we expect inflation to start to pick up once the economy reaches full employment in H2 2015...

Upward pressure on long-term rates should also intensify alongside accelerating inflation... the BoJ won’t be able to neutralise this upward pressure for long, and the long-term interest rate should also start to climb in the latter part of 2015, increasing the risk of a fiscal crisis.

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