Back in recession again.
Japan’s economy contracted at an 0.8% annual rate in the third quarter on a drop in business investment and reductions in business inventories. That follows on a revised 0.7% drop in the second quarter. The recession is the second since Shinzo Abe took over as Prime Minister in December 2012. Economists had estimated that Japan’s economy would contract by 0.2% in the third quarter.
With Asian markets down on Monday morning on the horrific terrorist attack in Paris, it’s hard to tell exactly how much the news of the recession is pushing Asian stocks downward. The MSCI Asia Pacific Index was down 0.6% at 9 a.m. in Tokyo. Japan’s Topix was off 1.5%. The yen was up slightly—0.1% to 122.46 to the dollar–as traders and investors looked for a safe haven after the Paris attacks.
The economic contraction in the third quarter was a result of weakness in the global economy. With growth in China’s economy slowing, Japanese companies cut back on investment—weaker business investment subtracted 0.2 percentage points from GDP growth in the period—and reduced inventories—that, the Japanese government said, reduced GDP growth by 0.5 percentage points in the quarter.
The next monetary policy meeting of the Bank of Japan comes this week on November 18 and November 19. The bank will issue its regular monthly report on Friday, November 20. Economists are expecting that growth will pick up in the fourth quarter, but they still forecast that the economy’s slip back into recession is likely to be enough to prod Bank of Japan Governor Haruhiko Kuroda into boosting monetary stimulus and expanding the current program of bond buying that is intended to boost inflation and weaken the yen. The government is also expected to announce a budget with increased spending in an effort to increase growth and to address the economic effects of Japan’s rapidly aging population.
What a week for potentially market-moving news!
Let me give you a quick run down, ok?
Monday: Beginning today and running through Thursday, the Central Committee of the Chinese Communist Party meets to formulate a new 5-year plan that would go into effect in 2016. Certainly on the agenda are a new target for economic growth, reforms for the country’s huge state-owned enterprises, and goals for continued urbanization, environmental regulation, and registration for China’s migrant workers. The goals aren’t actually released until ratified by the national legislature, which meets in March, and typically they don’t go into official effect until the fall. But while remaining officially unimplemented, many parts of China’s government start to react as soon as the meeting is over. That’s especially true of monetary authorities such as the People’s Bank. China’s central bank cut lending rates at the end of last week in anticipation of this meeting, but there’s still room for more moves on mortgage rates and restrictions, and bond issuance by local governments, just to name two issues. The Shanghai and Shenzhen markets were up modestly overnight (0.5% and 0.68%, respectively) in anticipation of the meeting.
Tuesday: Call it a preview of Thursday’s report on third quarter U.S. GDP growth. Wall Street is expecting a 1.3% drop in orders for durable goods for September. That would be an improvement from an even bigger decline in August. Look to see what the figures ex-aircraft show since a shift in the timing of one or 10 of these big-ticket orders can skew the entire top line of the report. Anything worse than Wall Street’s expectations will color opinion ahead of the GDP report.
Tuesday: It’s Apple (AAPL) day. The company reports revenue and earnings for its fiscal fourth quarter. Key issues will be sales of the new iPhone, where analysts will be looking for any signs of weakness in the launch, and sales in China, where they will be looking for signs that slowing growth in the Chinese economy has cut into sales. Apple CEO Tim Cook has repeatedly said that Apple isn’t seeing problems in its China results—that may have created expectations that could bite the company this quarter. I think Apple’s results this quarter are likely to have more effect on the market as a whole—where investors will look for clues to growth in the Chinese and global economies—than for technology stocks. Still watch for reaction from shares of Apple’s suppliers such as Analog Devices (ADI), Qualcomm (QCOM), and Synaptics (SYNA.)
Tuesday: More on strength or weakness in the U.S. economy when Ford Motor (F) reports third quarter earnings. (General Motors (GM) reported last week and showed a larger-than-expected gain in operating profits in North America.) Of particular interest at Ford will be sales for the company’s new mostly aluminum F-150 pickup truck.
Wednesday: The Federal Reserve’s Open Market Committee will probably do nothing on interest rates, but investors will be intently parsing any Fed comments for clues on what the U.S. central bank might do in December. Look for any change in the post-meeting statement on the Fed’s degree of worry about China now that it looks like that market has stabilized–for the moment, anyway.
Thursday: The U.S. Department of Commerce releases its preliminary estimate of third quarter GDP growth. Economists are looking for a year over year growth rate of just 1.9%, down from a 3.9% rate in the second quarter. The report will certainly move the odds on a December interest rate increase from the Federal Reserve. The odds for a December increase have moved up slightly recently on a decline in volatility in emerging markets.
Friday: The Bank of Japan meets: Will it stand pat on asset purchases and just reiterate recent comments from Governor Haruhiko Kuroda that the current program of quantitative easing is working (despite a lack of economic growth or inflation), or will the bank decide to increase its asset buying? Without some progress toward those two goals, the credibility of Abenomics will continue to erode. A promise last month from Prime Minister Shinzo Abe that the Japanese economy would be 20% larger by 2020 has resulted mostly in derisive laughter.
The euro had Mario Draghi’s pledge to do whatever it takes to support the currency. The dollar had Ben Bernanke’s pledge to keep short-term interest rates extraordinarily low for an extended period.
And now the yen has an “unlimited” loan program from the Bank of Japan that is looking more truly unlimited.
With Japanese GDP growth unexpectedly slowing to an annual 1% rate in the fourth quarter and with the Japanese consumer facing an increase in the national sales tax to 8% from 5% in April, Japan’s central bank today extended its unlimited loan program for another year. The program, which had lent 5.1 trillion yen ($49.8 billion) in low-interest cash to banks since December, had been scheduled to expire at the end of March. At the same time the bank loosened a limit on how much “unlimited” money a bank could borrow. Previous rules restricted a bank to borrowing cash equal to its net increase in lending. Now banks will be able to borrow twice the amount of any increase in lending.
The central bank also slightly increased the size of its monthly purchases of Japanese government bonds to a range of 6 trillion to 8 trillion yen from a target of approximately 7 trillion yen a month.
Today in Tokyo the Nikkei 225 stock index closed up 3.13%. Financial and real estate stocks were the big winners. In the financial sector Mitsubishi UFJ Financial Group (MTU) rose 5.03% and Sumitomo Mitsui Financial Group climbed 5.0%. (Mitsubishi UFJ Financial Group is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ ) In the real estate sector Heiwa Real Estate gained 4.13% and Mitsui Fudosan advanced 3.31%. The yen fell against the dollar by 0.4% to 102.34 yen to the dollar.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Mitsui Fudosan as of the end of December. For a full list of the stocks in the fund, see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.
Shares of Mitsubishi UFJ Financial Group (8306.JP in Tokyo or MTU in New York) kept on tumbling today despite unexpectedly positive earnings for the third quarter. Net income climbed to 255 billion yen ($2.5 billion) in the three months ended on December 31. That was a 5.4% increase from the December quarter of 2012 and beat the average estimate of 200 billion yen by analysts surveyed by Bloomberg. The bank is now 86% of the way to its profit target for fiscal year that ends on March 31 2014.
So why is the stock down 12% from December 31 to the close on February 3? And why does it look poised to fall some more in the short term? (Mitsubishi UFJ Financial Group is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ At the $5.88 February 3 close the ADRs traded less than 1% below my original March 26, 2013 purchase price of $5.92. I’m leaving my target price at $7.10.)
The problem is worry about the bank’s exposure to the sinking Japanese stock market and brutally low loan margins. Read more
When we checked in with the global economy last week, the numbers had raised questions about growth in developed economies. A pick up in growth in the world’s developed economies is supposed to offset a dip in growth in the developing world in 2014.
A parade of economic data this week will go a long way to confirming or refuting those worries.
In the U.S. consumer spending climbed 0.4% in December on top of a 0.6% increase in November. The November increase was the largest gain in five months. But consumer incomes didn’t show a comparable increase as salaries and wages came in close to flat for December. That brought income growth for all of 2013 to 2.8%, the weakest performance since an actual decline in 2008 of 2.8%. The anemic growth in incomes raises questions about the sustainability of the growth in consumer spending. If you’re an optimist about 2014, you believe that job growth will add to consumer income. A belief in job growth in 2014 depends, in turn, on a belief in increasing global demand for U.S. goods and services, and continued strength in housing and auto sales.
In Europe the latest data show unemployment in the EuroZone remained stuck at 12% in December and inflation actually moved slightly lower to 0.7% in January. Read more