By Reem Aboul Hosn, Research and Market Analyst Officer, CFI Ltd
By Reem Aboul Hosn, Research and Market Analyst Officer, CFI Ltd

Weak exports affect Japan’s GDP growth

Japan’s economy is operating below its potential, growth in Japan’s economy slowed down in the third quarter ending September, at its weakest in a year, as trade conflict threatened and slow global demand pressured economic expansion. 

The third largest economy after the United States and China grew at an annualized rate of 0.2% in the third quarter below expectations of economist, who predicted that the growth will slow, but less quickly. The performance was a sharp drop from previous quarter, when the economy grew at 1.8%. Exports slowed down, while private consumption grew 0.4% in the three months ending September, from a 0.6% increase in the previous quarter despite stronger demand from households that sought to beat the October tax hike. Due to the slowdown in consumption Japanese companies are facing a weak dollar, which diminishes their profits and makes their products more expensive overseas.

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Japanese companies are facing a weak dollar, which diminishes their profits and makes their products more expensive overseas

On the positive side, capital spending rose 0.9% in the third quarter, accelerating from the previous three months. That helped domestic demand to slightly increase. In 2012, the main reasons for growth were the loose monetary policy and heavy public investment and structural reform passed on by Prime Minister Shinzo Abe. Now, however the easing policy have weighed on the economy moreover the next nine months revision of the GDP estimate will be on Dec 09, 2019. Until then, the focus would be on component such as business spending, import and exports. Meanwhile, economists are projecting a contraction that may put Japan at risk of a technical recession in the fourth quarter of the year. The economy may rebound early next year but will lack momentum. The disappointing data may heighten signs from lawmakers for the government to boost fiscal spending to support the economy. 

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Entering 2020, the biggest challenges the country faces are on three fronts, manage the slump in exports created by slowing global growth, domestic market weakness post October 2019 sales tax hike, and the effects of the trade war between United States and China. The currency is expected to react to any slowdown in domestic economy in the coming months.

Technically, the chart shows a horizontal movement with pivot point at 108.50, as long as the price is above that point the price might reach the first resistance at 109 then 110.60 alternatively and during the short term period of one month, the price movement below 108.50 is expected to hit the support at 108.