Weaker Japanese yen boosting exports at last
The official leading indicator published by the Cabinet Office has a fairly reliable track record of forecasting swings in Japanese economic growth. Worryingly, the sharp dive in the official leading indicator suggests activity is likely to shrink 1% over the next 12 months. Activity is undoubtedly sluggish, implying that Japanese equities – which have fallen 10% this year while US and European markets are still holding on to gains – will continue to underperform. Nonetheless, there are reasons to hope that activity might not slump as sharply as leading indicators would suggest, notwithstanding the slowdown in the US, still Japan’s most important export market. One reason for Japan’s downturn this year has been a large drop in construction following the introduction of a new building code. Housing starts, for example, are 44% lower than a year ago. The government’s partial U-turn should speed up planning applications and help kick-start construction in the new year. Moreover, export orders which had stagnated in the first half of the year, are once again growing at double digit rates, boosted by the yen’s 20% fall in real terms over the past couple of years.
It is still uncertain how far the weaker yen can make up for weaker demand in the US and the downbeat economic climate, for now, will continue to depress Japanese equities. The fragile environment does at least benefit bonds. However, with 10-year yields only 1.5%, Japanese bonds look too expensive compared to bonds elsewhere, even if the Bank of Japan has been forced to shelve any ideas about raising interest rates again soon. While the interest rate outlook remains very negative for the Japanese yen, investors’ unwillingness to take on too much risk in the current jittery climate is likely to cushion the currency’s fall.
France goes on strike
Over the past 18 months, euro zone equity markets have soared – the Spanish and German markets have risen by a third – but more recently the region has begun to lose its lustre. A strike by railway workers, angry at proposed public-sector pensions reforms, paralysed France for a week, with the French Finance Ministry estimating that each day cost the French economy 400 million euros and cumulatively could knock 1% off French growth in the fourth quarter. Magistrates, civil servants teachers and students, all opposed to president Sarkozy’s proposed reforms, have joined railway workers on the picket line. While the French economy badly needs to embrace change, president Sarkozy’s record of generous compromise – such as the tax breaks he offered last month to fishermen in Brittany blocking ports in protest at soaring oil prices – suggests the president may not have the stomach or the political support to push through reform. Across the border, the German government has also reneged on labour reforms, boosting benefits for older unemployed workers, the cut in which has helped to reduce German unemployment to its lowest level in 14 years. Moreover, activity has slowed sharply with construction orders once again contracting. For the past decade, Spain has grown on average 1.5% a year faster than the rest of the euro zone, but even here growth has been slowing, choked by the downturn in the housing market in the wake of the country’s construction boom. With construction accounting for 11% of the country’s annual economic activity – compared to 7% a decade ago – the construction downturn will have a noticeable impact on growth and next year economists on average expect Spain to grow at its slowest rate since 1996. …
