Japan goes into recession – global trade signal

The economic data shows that Japan has slumped into a recession for the first time since 2001. The two consecutive quarters of negative GDP came very fast with the slowdown in exports. The combination of slower global growth and a strengthening yen has had a strong negative impact on the Japanese economy. With both the US and China, its two largest trading partners showing slow growth there is little that can be done to reverse these numbers. Profits fro major companies are all down.

The effective exchange rate from the Bank of Japan is now back to levels seen in late 2000 with a jump of 10% in the last month. Every time there is more uncertainty about the global economy the yen appreciates. The size of the delivering and capital inflows seems to be more that what the Ministry of Finance can stop.

The Japanese government has limited alternatives. The Bank of Japan cut rates by 20 bps to 30 bps for the first time in seven years but it there is little that monetary policy can do to stop the freight train of an appreciating currency. Given the size of public debt, there is a little room for fiscal stimulus.

We thought there would have been some form of intervention in the dollar/yen or eur/yen rates, but the volatility and and moves have been unprecedented and have hurt hedgers and speculators alike.