The Japanese economy is showing further signs of a big slowdown, following a recent GDP report for Q4 2019. It showed that Japan’s economy shrank at the fastest pace in almost six years, is attributed to a sales tax hike that has hit consumer and business spending. Outside of the noted domestic factors, there are growing worries that the Coronavirus could force Japan into a recession.
A reading of -1.6% vs. expected -1.0% (previous 0.4%) was seen. It was the biggest fall since the second quarter of 2014. Japanese policymakers (BOJ) had warned that the economy will suffer a contraction in October-December as the sales tax hike would be hurtful. However, little did they know it would be as damaging, in addition to the Coronavirus which they would not have foreseen.
There is a growing fallout from the virus spreading, which is damaging output and tourism, this may force a significant impact on Japan if it’s not contained in coming months.
The chances that the economy will suffer another contraction in the January-March period (Q1 2020), are reasonable given the epidemic. The virus will mainly hurt inbound tourism and exports, but may also weigh on domestic consumption.
Do note that two consecutive readings of contractions are technically a recession, which could spark some chaos and panic globally. Additionally, should this coronavirus not be contained by the time of the Tokyo Olympic Games, the damage to the economy will be huge.
What does this mean for the markets?
It is something to keep an eye on because Japan is the third-largest economy in the world. If at their next GDP reading report another contraction, then it could spark a huge market sell-off. There will be large flows out of stocks, decent gains in Gold (XAU/USD), CHF, USD. The JPY is traditionally a safe-haven, however, it would be hard to gauge how JPY would respond to its own economy potentially collapsing.
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