Sunday, November 15, 2009

Japanese GDP... 4.8% Growth, but Ugly?

EconomPic detailed Japan's odd Q2 GDP print in which real GDP rebounded to positive territory for the first time since Q4 2007, even as nominal GDP continued to contract:

This has happened before (but real GDP has never been higher, while nominal GDP was negative).
That is... until this release.

The issue with any recovery in real only terms is that the country's debt (and there is a ton in Japan) remains in nominal terms. Thus, the fact that Japan produced more (4.8% quarter over quarter annualized more in real terms), but the overall value of that production is still less in Yen terms (-0.3% in nominal space) makes it difficult to service that debt. It is not a surprise then that the cost of credit insurance on Japanese sovereign debt has risen during this "recovery". Per the WSJ:
Canary in the coal mine? The cost of insuring Japanese government bonds against default has doubled to 0.75 percentage point in the past three months, as markets fret about debt issuance. Credit risk is assuming ever-greater stature in government-bond markets previously blithely assumed to be risk-free.

Its debt-to-gross-domestic-product ratio is set to rise to a staggering 227% in 2010, the International Monetary Fund forecasts, making it particularly exposed to any rise in market interest rates. Japan's aging population is a crucial concern, driving a change from saving, much of which went into JGBs, to consuming.
Japanese government officials seem to share the concern that the "strong" print may not be all it initially seems. Per Bloomberg:
The acceleration in the world’s second largest economy is projected to fade in coming quarters as the impact of stimulus spending wanes and job losses restrain consumer spending. Prime Minister Yukio Hatoyama said the economy remains “worrisome” and that another supplementary budget is “probably” warranted.
I second that and will repeat the question I posed last quarter; how strong is end-user demand really if the price deflator increases GDP a full 5% quarter over quarter (annualized)?

Source: ESRI

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