Monday, February 16, 2009

Weaker Japanese Economy Makes Yen Stronger

The Japanese GDP report was worse than expected, with GDP falling 3.3% or 12.7% compared to the previous quarter. Compared to the fourth quarter of 2007, the decline was 4.6%. Nominal GDP fell 6.6% at an annual rate compared to the previous quarter and 3.8% compared to Q4 2007.

The quarterly change is a lot less dire if you take terms of trade changes into account. After all, a 6% inflation rate for Japan for Q4 2008 does look like a bit unreasonable. If you instead assume 2.7% deflation (the domestic demand deflator), the decline is "merely" 3.9%. But that is still worse than both America and the Euro area (after similar adjustments have been made for them), and on a yearly basis that factor is a lot less important, as the adjusted four quarter change is 4.1%.

Somewhat discomforting is also the fact that the main factors boosting GDP, apart from lower oil prices, was government consumption and inventory buildup. Final private demand fell even more than 4%, with net exports and fixed investments declining the most.

As long as the yen stays overvalued, it will be difficult for Japan to recover. Unfortunately for Japan, it is like America trapped in a situation where a weaker economy causes the currency to appreciate in value. The yen did indeed react to the worse than expected number by getting even stronger.


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