At the beginning of this week, Japan preliminary GDP report once again disappoints. The second lower than zero growth means that Japan has entered triple-dip recession. Then yesterday, PM Abe announced tax hike and upcoming snap election. What it means for forex market?

At the beginning of this week, Japan preliminary GDP report once again disappoints. After recorded -7.35 annualized growth in the previous quarter, Japan economy is apparently still contracted further, as much as -1.6% in the third quarter of 2014. The second lower than zero growth means that Japan has entered triple-dip recession. Then yesterday, PM Abe announced tax hike and upcoming snap election. What it means for forex market?

Japan Recession Trap

Japan is the third biggest economy in the world after the US and China, or the fourth biggest if European Union is counted as a single entity (EU cumulatively has bigger total GDP than US and China). Japan is also one of the biggest patent holder due to their innovative culture, is the world's biggest electronics producer, and third biggest in terms of automobile industry. Moreover, Japan has a large amount international investment surplus, owing to its position as one of the world's biggest private financial asset along with the US, German, and UK.

However, although Japan is one of the world's economy giant, in the last decade it has battled against economic slump and several times even slipped into recession. Japan recession has became a sickness entrenched strongly in its economy. In 2012, Prime Minister Shinzo Abe launched a string of policy aimed at reigniting Japanese economy that later known as 'Abenomics'. As a part of the plan, a whopping amount of stimulus package is launched by the Bank of Japan in order to depreciate the Japanese Yen. Apart from boosting the country's competitiveness, it was also useful in encouraging investors to invest in the stock market. Consequently, Tokyo stock market shot up, and the economy seemed to be at the right track to recovery in the beginning of this year.

Nevertheless, prolonged economic slump and recovery efforts has inflicted a great deal of damage on Japan fiscal side. Between 2008-2014 alone, percentage of government debt-per-GDP rose from 167% to 227.2%, which means that Japan debt is at least twice bigger than its total GDP. In order to cope with it, the government need to hike taxes that has largely been untouchable in the last two decades. Because of that, Abe's predecessor PM Yoshihiko Noda scheduled consumption tax hike for two dates; the first is in April 2014 from 5% to 8%, and the second is in October 2015 from 8% to 10%.

Slight improvement in the beginning of 2014 strengthened Japan government resolve to hike taxes, so that was what they did back in April. But as we found out later, the impact is disastrous. In the same quarter, Japan economic growth fell far below zero, and the contraction is still ongoing. According to analyst, the problem is that previous economic recovery was enjoyed only by a certain group. The Associated Press mentioned that most companies have not passed on windfall gains from stock price increases and surging profits to their workers in the form of higher wages. Time.com  also reported that Some critical changes, like a loosening of labor laws, seem to be off the menu entirely. The result is that the actual potential of the economy has not been enhanced. Meanwhile, the welfare of the average Japanese family hasn't improved either. Wages haven't advanced much, while prices have increased. Consequently, when tax was hiked, people spent less money than ever, and triggered recession.

Delayed Tax Hike, Snap Election

As mentioned above, slight recovery in the beginning of 2014 was enjoyed only by a certain cliques. As a whole, wages remain unchanged, and so when prices rose due to the tax hike, households buying power decreased. It means bad news for domestic companies and foreign countries that import goods and services to Japan, as well as for Japan aggregate demands and overall growth.

Plummeted growth became the reason why PM Abe announced tax hike yesterday (18/11) along with lower house of parliament dissolution and snap election. Abe believed that people will be burdened if the economy loses momentum to grow due to the planned tax hike. Therefore, the next ax hike will beed by a year and a half. Meanwhile, he also saw the need for him to muster supports for his economic policies. In this sense, Japan lower house of parliament dissolution will be done as soon as November 21st and a snap election will be held at mid-December.

shinzo abe 

The dissolution of the parliament means that many Abenomics agendas has to be suspended to later date; prolonging recovery efforts and increase political uncertainty for the next two months. This is especially because PM Abe himself said that he is prepared to step down if LDP-Komeito coallition lose in the election. As the ruling coalition now wield the highest number of seats in the house, it seems unlikely. However, let us not forget that Abenomics depend on PM Abe's pivotal role. If the worst happen and Abe is no longer spearheading the projects, Japan might recast its recovery plans.

Triple-Dip Recession

The current recession is not the first time Japan plunged into the same ditch. In the last decade alone, Japan has experienced it three times, including the current one (triple-dip recession). These ups and downs dragged the economy, as each time the economy plunged, recovery has to be restarted. Meanwhile, the scale of Japan economy and its influence on worldwide economy make sure that the impact of the recession will hit hard on more than domestic area.


JapanRecession in Japan, marked by GDP growth below zero for at least two quarters

Japan is one of the biggest investor in Asia, particularly South East Asia. Japan investment could be found in almost every sector, from automobile and electronics manufacturing to Bread-making businesses. Hence, Japan recession could drag down Asian economy and everyone else in the Pacific Rim. Moreover, it happened when China slowed down and Europe stagnated.

In terms of global influence, Japan recession might have wider impact than what is described in this editorial. However, we should all hope that Japan could recover quickly, as drawn-out recession surely could destabilize global economy. Meanwhile, if you are a forex trader, below is three things you should keep in mind when you trade the Japanese Yen.

Impact In The Forex Market

1. Potential Additional Stimulus
Not all three arrows of Abenomics has been deployed. Structural reform, for one thing, is still unclear. However, to this day, it remains far from reaching the 2% inflation target. In the circumstances, the government might have to release additional fiscal and monetary stimulus. The Associated Press on Monday (17/11) mentioned that PM Abe is expected to announce a package worth about 3 trillion yen to 4 trillion yen ($26 billion to $35 billion) in extra spending on subsidies to low-income families, help for small and medium-sized companies and other measures meant to boost consumer spending and business investment.

2. Widen Policy Divergence And Yen Carry Trade
USD/JPY rose up to highest level since 2007 and EUR/JPY break thorugh six year high following PM Abe announcement of tax hike. Recession and the subsequent PM Abe decisions gave raise to expectation that Japan will maintain loose money policy for longer period. It widened the gap between Japan and other countries, particularly the US. It needs to be noted that at 0%, Japan has one of the lowest interest rate in the world.

3. High Volatility On Yen Pairs
Japanese Yen is expected to maintain its record high volatility for some time forward. Although overall trend is bearish as long as policy divergence remain, but there are several variable that might inflict considerable corrections.

  • USDJPY usually bearish when Tokyo stock market downs. Currently, stocks are bullish due to the tax hike, but it is also likely to drop when the depth of the recession hits. Martin Schwerdtfeger from Toronto's TD Securities said to Reuters, There are going to be quite a few things for the market to digest and we could see a fall in stocks and strengthening in the yen.
  • Japan so-called recession is still considerably better than Eurozone slowdown. Unemployment in the country is just a mere 3.6%, compared to 11.5% in the Euro Area, 5.8% in the US, and 6% in the UK. Wages that were said to have stagnated too, is actually has stepped up. Business Insider exposed that Japan basic wage growth has picked up since January 2013 and is currently rising at the fastest pace in six years. Boris Shclossberg of BK Asset Management wrote that lower energy costs and lower yen should spur demand in Q4 of this year and help GDP turn positive once again. Therefore, we could say that the recession is temporary, and Japan economic data could show improvement anytime.


Apart from that, the risk emerged from overbought EURUSD and EURJPY, as well as carry trades, cannot be ignored. These indications point to high volatility period in which the Japanese Yen will be traded.