Japan’s economic contraction in the fourth quarter has deepened lingering uncertainty in global financial markets, which have been gyrating since the start of the year.
On Monday, the Nikkei stock average skyrocketed 1,069 points, or more than 7 percent, in response to Friday’s more modest rallies in the United States and Europe, but experts say it is still unclear when Tokyo’s downtrend will end.
“The markets will still be struggling against a very strong wind,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. “There will be no way out there for markets to get out of their bearish mood for at least a month.”
Gross domestic product shrank 0.4 percent in the October-December quarter, an annualized rate of 1.4 percent, mainly due to weak domestic demand. The second quarterly contraction of 2015 followed revised growth of 1.3 percent in the previous quarter.
Ueno said three negative factors need to be wiped out for financial markets to counter the growing pessimism: concern over China’s slowdown, oil’s sliding prices, and growing concern about the U.S. recovery. Unease about China will probably take the most time to overcome, he said.
“The worries over the Chinese economy will probably linger this year and next year,” Ueno said.
Experts said the market is starting to expect some kind of global policy cooperation to emerge from the Group of 20 meeting of developed and emerging economies later this month in Shanghai. But many point out that any agreement to shore up stock markets would only be temporary.
“Since policy discussions have been shifting to the G-20 from the G-7, it is getting hard for member countries to take a step, although they can probably release a message,” said Hajime Inoue, economist at Japan Research Institute Ltd., referring to the Group of Seven leading industrialized nations.
“To some extent, it could lend a psychological hand to the markets, but I don’t expect the meeting to decide on any actions with impact that can turn the trend around,” he said.
Japan, meanwhile, seems to be running out of options. Additional pump-priming steps look unrealistic even as Prime Minister Shinzo Abe attaches new goals to his struggling three-tiered Abenomics program, which is aimed at ending deflation by weakening the yen, boosting the stock market and restructuring the economy.
The first “arrow” of the program, the Bank of Japan’s “qualitative and quantitative” monetary easing strategy, was originally considered a temporary measure to buy time for Abe’s structural reform promise, the third arrow. But many economists say the prime minister has failed to make significant progress on restructuring.
Then, on Jan. 22, 2013, Abe and the BOJ jointly announced they had adopted an inflation target of 2 percent. But the schedule for achieving it has been delayed three times already.
As for the second arrow, fiscal spending, the Diet is still deliberating the fiscal 2016 budget, which experts say means it is unlikely to compile an extraordinary budget soon. The government does not plan to announce its next economic policy package until May.
In the meantime, the BOJ’s monetary easing measures do not look unlimited because further interest rate falls would hurt banks’ profitability. In addition, experts say the impact of Japan’s first negative interest rate fizzled quickly.
Some experts say BOJ Gov. Haruhiko Kuroda’s shock Jan. 29 decision to go negative triggered stock market volatility around the world. His intention was to weaken the yen and shore up the sinking stock market. But the surprise announcement failed — Tokyo stocks continued to tumble. The yen sank briefly against the dollar before beginning a march that would see it hit 110. It settled at around 114 on Monday.
They said Kuroda’s gambit may have been undermined by the same external factors that have been roiling the world’s stock markets, one after another. Besides the three factors cited by Ueno, European credit concerns rattled global markets last week, prompting a capital flight to yen-denominated assets.
A stronger yen will work against the exporters Abe is trying to help, but economists said BOJ intervention is unlikely because it would only accelerate the global race to devalue currencies.
“For the time being, the only thing Japan can do to halt the yen’s strengthening is something like verbal intervention,” Inoue of Japan Research said.