Bulls And Bears On Japan: Value Investors Dive In

Behind the real GDP decline in Q4

Earlier this week, it was reported that Japan's GDP plunged 1.6% quarter over quarter, which was worse than the Bloomberg consensus of a 1% decline. Since growth in the third quarter was revised down from 0.4% to 0.1% quarter over quarter, output declined 0.4% year over year in the fourth quarter.

Capital Economics economist Marcel Thieliant said in a report dated Feb. 17 that private consumption plunged 2.9% quarter over quarter. The government froze the tax rate on food at 8%, which did help. Spending on services was better, but spending on durable goods plunged 12.8% quarter over quarter. He expects consumer spending to bounce back in the first quarter unless consumer confidence takes a significant hit from the coronavirus outbreak.

In a separate report, Thieliant and fellow Capital Economics economist Tom Learmouth said the two main causes of the sharp decline in manufacturing output for the fourth quarter were the sales tax increase in October and Typhoon Hagibis.

They pointed out that both Japan and Germany saw their industrial production fall in step with each other. This is significant as the two nations both depend heavily on the auto industry for their manufacturing output. Since both nations were affected, they argue that external factors contributed to the decline in manufacturing output.

Bulls and bears on Japan: bonds

According to Thieliant and Learmouth, yields on 10-year Japanese government bonds have been hovering close to the midpoint of the Bank of Japan's "around zero" target this year. Gold priced and Japanese government bond yields have diverged in recent months. However, while demand for gold has increased due to the coronavirus outbreak, safe-haven demand for Japanese bonds has been lower.

The spread between U.S. Treasuries and Japanese government bonds has declined in the last month. However, the yen has not strengthened against the U.S. dollar. The Capital Economics team also noted that equity markets have been holding up fairly well despite the coronavirus outbreak.

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