nikkei 225 japans lifeless growth figures 1052382015

The Japanese economy contracted last quarter, underpinned by plummeting exports, slack consumer spending and a lack of corporate investment. Gross domestic product fell a seasonally adjusted 0.4% q/q in Q2, just beating an expected 0.5% drop. Annualised growth fell from a revised 4.5% q/q (unrevised 3.9%) gain to a 1.6% q/q contraction, which was also slightly better than expected. This was accompanied by disappointing 0.8% q/q and 0.1% q/q drops in private consumption and business spending, respectively.

Furthermore, there’s no light on the horizon for Japan’s economy, with a bleak outlook for regional and global growth expected to limit appetite for Japanese exporters, despite a still weak exchange rate. Domestically, broadly softening consumer and business confidence may choke another key avenue for growth. In fact, if conditions deteriorate any more it may prompt the Bank of Japan to expand its already massive stimulus program.

Yen falls, Nikkei jumps

Overall, today’s miserable GDP numbers led to a sell-off in the yen as the market became even more dovish about the outlook for monetary policy in Japan, which helped the Nikkei capitalise on some opening gains. If economic data doesn’t improve soon, the BoJ may be forced to expand its already massive stimulus program in coming months. Previously the bank has said it wouldn’t respond to temporary threats to the economy and its CPI outlook, like falling oil prices, but these drags on consumer prices and economic growth don’t appear to be going anywhere soon.

USDJPY jumped around 15 pips higher in the immediate aftermath of the data, while the Nikkei added to its opening gains. However, risk adverse investor sentiment throughout Asia weighed on Japanese equities later in the session.

The Nikkei has rallied around an astonishing 150% since the end of 2011, largely on the promise of extreme monetary policy loosening, otherwise known as QQE. However, the rally has recently lost some momentum just below 2,100 as investors question the effectiveness of said easing and the longevity of the aforementioned rally amidst a deterioration in global risk appetite; a massive and prolonged sell-off in Chinese equities and renewed fears about the health of Europe have been infecting global investor sentiment. Unless risk appetite improves, the only avenue for further gains may the idea of the BoJ throwing more cash into the economy at a faster pace and hoping some of it sticks.

Nikkei 225

Source: City Index