Low Oil Prices are Likely to Amplify Existing Problems in Japan

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Japanese PM Shinz┼Ź Abe sailed through the recent Japanese parliamentary elections. His Liberal Democratic Party won a decisive victory in Sunday’s elections to the lower house of the Japanese parliament. Together with its coalition partner, the Komeito party, the new government secured more than 317 seats which is the minimum for a two-thirds majority, although there was a low turnout. This victory for Mr Abe comes after a time when Japan recently entered a recession (Final GDP q/q, Actual: -0.5%, Forecast: -0.1%, Previous: -0.4%, 07/12/2014). Abenomics has been one of the key policies used by the Japanese coalition to revive growth and kick start inflation. This is a policy that has sometimes delivered although in the majority this has not been the case. Much of the failure can be attributed to the sales tax hike from 5% to 8%, implemented in April 2014, which cut consumer spending and subsequently resulted in a cut back production in goods and services. The recent decision taken by Mr Abe has therefore been to delay the next planned sales tax hike, from 8% to 10% until April 2017. An earlier sales tax hike may have helped pushed inflation higher and cut public debt but possibly at the cost of lower or even negative growth.

Japan is currently facing real difficulties as is shown by recent data produced. Core machinery orders m/m has fallen to -6.4% indicating that business investment is falling. It also indicates that there is a stock still needing to be sold which hasn’t been probably due to the sales tax hike. To amplify problems, oil prices have declined which may help consumers as they may pay less for fuel due to a fall in import costs. However, lower prices for energy will lower inflation further. The Bank of Japan is therefore likely to cut its inflation forecast with the primary reasons cited being the decline of oil prices and the current weak Japanese economy. The disinflation created by the fall in oil prices is likely only to be temporary and with the slump in oil prices the Yen is likely to strengthen as Russia’s economy is beginning to look unstable due to it having commodity driven growth. At times of uncertainty, investors look for a safe haven such as the Yen.

The US recovery is very strong even with the recent slump in oil prices. Retail (0.7%) and preliminary University of Michigan consumer sentiment (93.8, nearly an eight-year high) have beaten forecasts. The latter figure indicates that consumers are happy about the current wage prospects and the labour market whereas the former figure has been as a result of seasonal consumer spending. Expectations for the Fed to implement a rate hike have therefore increased and a timetable for this may be given this week at the FOMC press conference. The strong recovery is expected to continue until next year and with the low oil prices disposable income should increase and which will help fuel inflation and growth.


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