Tuesday, 17 November 2009

Japan - a foretaste of what lies ahead on global recession menu?

The Nikkei 225 continues to display the most negative characteristics of any of the world's major equity indices. In trading Tuesday (November 17th) the index dropped back and the short term support line close to 9700 is in danger of being violated. The clear breaks below two recent "fan" lines also underlines the fact that the Japanese bear market which began in 1990 has almost lasted for 20 years and that the Nikkei has lost, in nominal terms, three quarters of the value seen in late 1989.

In saying "nominal terms" one has to be less concerned about adjusting the Nikkei price to account for inflation as this is not a concern for the Japanese economy. In fact, as evidenced in this interesting piece, the real problem facing the second largest economy is deflation.
Japanese deflation just keeps getting uglier. Prices dropped 2.6% year over year in the third quarter, the worst drop in 58 years. This just makes the country's crushing debt burden even heavier.

More importantly, the deflation data reminds us that the Japanese economy isn't growing. It's just deflating.

While Japanese third quarter GDP 'growth' surprised economists, notching 1.2% recently (~4.8% annualized), if everything's deflating at 2.6% then GDP really doesn't say much about growing economic activity. Economic activity is actually still falling once you factor out deflation; note that seasonally-adjusted nominal GDP officially fell 0.3% in the third quarter. Unadjusted nominal GDP fell 4.4%. See the green rows in the screen shots below, taken from the latest Japanese GDP releases.

Don't be fooled by deflation mucking up the real meaning of GDP data -- Japan's economy is still sinking.
Let us hope that the bursting of the Nikkei bubble almost 20 years ago and the ongoing slide in their asset prices ever since is not a foretaste of the next course on the global recession menu.

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