Industrial production in Japan contracted for the second month in a row in November, increasing the odds of a recession in the fourth quarter due to lower domestic demand and exports.

The bulk of assumptions about medium-term future of the Yen now revolve around the fiscal spending path in 2020. The Japanese public debt has been fluctuating around 237% of GDP since 2014 but printing debt at an accelerated pace will not only supply more ammo to the Bank of Japan (which OMO policy is now faced with a limited offer of bonds in the market) but is also a necessary measure to counter export shocks. In recent months, weak domestic demand (after the sales tax hike) and lagging exports have failed the economy. The yen also lost the “common theme” with Gold, which, despite the last surge in demand for defensive assets, remained relatively unpopular with investors:

q.png

Japan's factory data is particularly important in light of the fact that the manufacturing sector generates about 20% of GDP.

Although the magnitude of the drop of factory output in November was below expectations (-0.9% versus -1.4% consensus), the October figure was revised down to -4.5% MoM. This is the worst reading in the entire history of observation (since January 2013).

The growth of individual components of the manufacturing sector turned out to be heterogeneous - industries producing consumer goods grew (cars and car engines), while industries specializing in capital goods and high-tech equipment showed negative growth. In total, the change was negative.

It is expected that in the first quarter of 2020, the Japanese economy will go into recovery, the range of estimates of which is now quite wide.

The consumer picture in Japan turned out to be even less positive - retail sales for November fell 2.1%, worse than estimates, which was a natural reaction to the government’s action to raise the sales tax.

Unemployment fell in November to 2.2% from 2.4% in the previous month, indicating the absence of potential shocks for consumption coming from the labor market.

The government has lowered the forecast for growth four times this year. Last week, the manufacturing sector was the primary cause of the downward revise. The authorities approved a record budget for the upcoming fiscal year, part of the cost will go to finance a package of fiscal measures in the amount of 122 billion dollars.

The Bank of Japan did not change policy settings last week, saying the risks for recovery remain high. The GDP forecast has been revised down.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 72% and 71% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.