Japan Market Strategy - Slipping Into Recession

By Guneet Singh Sahni - Japan Market Analyst

Last week, the Nikkei 225 Index posted a modest gain of 0.6%, or 74 points, to close at 13,168 after Toyota Motors (NYSE:TM) was able to maintain its growth outlook for FY2008. The Financial Sector was a major dampener, offsetting the gain. The decline was led by Mitsubishi UFJ (NYSE:MTU) and Sumitomo Mitsui Financial Group Inc. (OTC: SMFJY). Mitsubishi UFJ recorded a decline of 66% in net profits on the back of increasing provisions and interest rates.

Article interests NYSE: JEQ, JOF, NYX, Nasdaq: IIJI, JSCFX, QQQQ, AMEX: DIA, SPY, DOG, SDS, QLD)

Recession Fears Haunt Japan

Japan's Cabinet Office said on Aug. 7 that the economy may be in a recession, due to falling exports and rising prices that are impacting consumer spending. Earnings have fallen on component cost increase, thus stalling wage hikes and cooling consumer demand. This has raised fears that GDP probably contracted last quarter, bringing the country to the brink of its first recession in six years.

Sentiment among Japanese merchants in July fell to the lowest level since the last recession, as higher food and oil prices discouraged consumers from spending. The Economy Watchers Index, a survey of barbers, taxi drivers and others who deal with consumers, dropped to 29.3, the lowest since October 2001, from 29.5 in June... but the recession may be mild.

Japanese machinery orders (an indicator of capital spending in three to six months) for the month of June fell less than expectations, signaling that any recession may be mild. Equipment Orders declined 2.6% sequentially (against the consensus estimate of 9.9%). Equipment Orders had climbed 10.4% earlier in the month of May.

Outlook

Any recession this year would be different from previous ones, as the corporate sector is prepared to face the slowdown. Unlike past recessions, companies have trimmed excess debt, workers and capacity. Even Japan's new Economic Minister, Yosano, says that Japan will recover once the U.S. and global economy improves. Exporters are less reliant on customers from the U.S. and Europe, where the global slowdown is most pronounced. Still, exports are slowing, and soaring material costs have squeezed profits, compelling companies to cut production and hiring. As per Japan's economic policy makers, gross domestic product probably fell at an annual 2.3% rate last quarter, the first contraction in a year.

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