Posted by: Ian Rowley on November 13, 2007
It’s hard not to feel some sympathy for Japanese investors. Earlier this year, they got blamed for stoking the yen carry trade by plowing into higher yielding overseas assets. Now, with the yen appreciating sharply, those overseas investments are falling in value while holdings of Japanese stocks are tanking still faster. And all that despite steady, if unspectacular, growth by the Japanese economy during the third quarter.
Today, Japan’s Cabinet Office announced that GDP during the third quarter rose an annualized 2.6%. While much better than the previous quarter, and higher than some analysts expected, it did little to stop the Nikkei 225’s recent slide. As I write, the index is down 81.58 at 15,115.51 and looks set to close down for the eighth day in a row.
The irony that the slump in the Nikkei is being blamed on fears over the U.S. economy won’t be lost on investors. Year to date, the Nikkei is down 12%, compared to a 4.2% rise in Dow Jones Industrial Average. That’s despite Japanese financial interests having only minimal exposure to the fallout from the problems in the U.S. subprime market.
The problem, of course, is that Japan’s economy still remains heavily dependent on the U.S. for its exports. Despite the rise of China and other emerging markets, automakers like Toyota and Nissan, for example, still make about 60% of its profits in North America. For Honda, it’s even higher. Throw in the impact of a rising yen—up from over 120 to the dollar in the spring to 110 today—and there’s a double whammy on the outlook for the profitability of Japanese exporters which dominate the Nikkei index.
If exports weaken consumption in Japan is unlikely to fill the breach. Just one third of the third quarter 2.6% annualized rise in GDP is attributable to Japan’s domestic economy. Personal consumption, which accounts for about 55% of Japan’s GDP, gained just 0.3% from the second quarter, although it was a fourth successive quarterly rise.
Adding to the gloomy outlook, Lehman Brothers’ economist Hiroshi Shiraishi noted that while the quarterly growth was better than he had expected, the risk that exports will weaken could be an issue further down the line. “We see the risk of Japan entering into a recession to be on the rise,” Shiraishi said in a note to investors.
Even worse for Japanese investors, there appear few signs that interest on their cash savings will get a boost anytime soon from the Bank of Japan. Follow today’s GDP data, Naoki Murakami, a Goldman Sachs economist, said that the likelihood is that the Bank of Japan will now delaying raising benchmark interest rates, currently at just 0.5%, until the second half of next year.