Japan’s Contracting Economy: Investors Call For Easing Measures

With Japan's gross domestic product contracting in the third quarter compared to that in the previous quarter, investors feel that there is an urgent need to take measures for enhancing the growth potential of the economy.

Market participants feel that Japan’s economy will need more support after the data released earlier this month by the Cabinet Office showed that the country’s GDP, which measures the annualized change in the inflation-adjusted value of all goods and services produced by the economy, shrank to 0.9 percent in the quarter ending Sept 30, down from a 0.1 percent rise in the previous three months.

Last month, the Bank of Japan announced more monetary easing policies and expanded the asset purchase program (APP) by about 11 trillion yen ($138-billion). This brings the total size of the APP to about 91 trillion yen, of which 25 trillion yen is in loans and the remaining 66 trillion yen is for asset purchases. The policy board agreed a further 5-trillion yen each of Japanese government bonds and treasury bill purchases and announced 0.91 trillion yen of purchases of risk assets.

Market players sense the urgent need for more measures, especially with the country’s core consumer prices continuing to fall in September, indicating that deflation persists to impair the economic growth prospects. The data released by Japan’s Statistics Bureau show that the consumer prices declined to 0.1 percent in September, down from 0.3 percent fall in August.

Adding to the concerns, Japan’s industrial output declined in September compared to that in the previous month, indicating that the weak global demand was continuing to have its impact on the country’s economy.

According to the data released this month by the Ministry of Economy, Trade and Industry, Japan’s industrial production, which measures the change in the total inflation-adjusted value of output produced by manufacturers, mines, and utilities, fell 4.1 percent in September compared to that in the previous month while it declined 4.1 percent in August.

Market players sense that more measures, other than the currently available stimulus, will be required to revive the growth momentum. The next move can be that of increasing the funds available to support lending to the fast-growing sectors rather than to add again to the outright asset purchases, which was already undertaken last month.

Japan faced a sudden development in political scene this week with Prime Minister Yoshihiko Noda dissolving the Diet Friday and announcing the date of the general election (Dec 16). Investors hope that the main opposition -- Liberal Democratic Party -- led by Shinzo Abe, the proponent of aggressive monetary easing measures, will win the next elections.