Japan's GDP lifted by foreign trade

Impressive growth from Japan’s regional neighbors, most notably China, seems to be lifting the country out of its recent recession as an increase in exports and boost in capital spending has translated to positive reports from financial authorities, with the growth at 4 percent annualized for the last 3 months of the year.

Profits for many Japanese firms rose significantly at the tail end of 2009, even considering the issues at two of the nation’s corporate titans, Toyota and Japan Airlines Corp., which has grabbed most of the headlines.

Japan is by no means home and dry, however. The huge stimulus injected into the economy is set to end soon, and the country may lose the number two world ranking it holds by a small margin over its biggest trading partner China by the end of the year. Substantial public debt will make it very difficult to sustain the recovery, along with ongoing deflation and growth spurred only by significant cost-cutting.

The outlook remains positive according to the nation’s financial authorities and economic experts who claim the latest reports “show that Japan could finally be reaching a level of sustainable recovery.” That was the opinion of parliamentary secretary Keisuke Tsumura. He added that the danger of another quick dip into recession has become unlikely.

The surprising lift in the nation’s economy may stave off further quantitative easing from the Bank of Japan, at least in the short-term. The central bank’s aim for interest rates now stands at around 0.2 percent. The BOJ also assists with much needed liquidity to the currency markets hoping to boost demand. The central bank’s board will meet next week and analysts expect their policies to remain as they are.

With other major world economies such as China, with nearly 11 percent growth, and the United States, which reported 6 percent expansion, following in Japan’s footsteps the global outlook looks more positive. Japan itself announced a 5 percent annualized growth rate for Q4.

The only region lagging behind at this time is the European bloc with just a 0.5 percent gain for the same time period.

“The performance by most of the big 300 Japanese firms is very encouraging,” said Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management who conducted a survey released on Tuesday. “The companies reported a combined 220 percent gain in profits during the last quarter. The recovery is on.”

Japan’s economy may have weathered the storm

According to a press release on Tuesday, faster-than-predicted growth in the last quarter of 2009 means that it is almost certain Japan will not face another recessionary dip.

A government representative of the ministry of finance, Naoto Kan, said that Japan had “shown encouraging signs of a mini-recovery” after the world’s second largest economy suffered its worst slump since World War Two. “We seem to be avoiding a secondary dip,” he said.

The upswing is mostly down to increased domestic demands and a significant improvement in exports, a factor on which Japan is hugely dependent. These two recoveries led to a gain in the nations GDP by over 1 percent compared to the previous quarter, or nearly 5 percent annualized.

The exact dimensions of the recovery are still a concern for Mr. Kan however, and he commented that tax jumps may be needed to stabilize the economy further.

“The economies of other countries affects us enormously due to our reliance on international trade, also there is a drop in employment we need to consider. As such, we need to stay cautious, there are still risks,” he said.

The government have been injecting large amounts of stimulus into the economy and most observers believe that growth could taper off sharply once the effects of those policy actions dissipate.

“It’s difficult to try and predict what will happen in the second half of this year as there has been so much intervention by the government,” said Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management.

“They are unlikely to spur domestic demand as they already have their hands full keeping their own policies in check,” he added.

With net exports contributing to 1 percentage point of the GDP expansion in the fourth quarter, Japan’s heavy reliance on exports for economic growth was further highlighted.

Japanese stocks seem to have been relatively unaffected by the recent news, having only started trading again since China’s own fiscal action last month. The Nikkei index finished with a surprising 0.9 percent dip.

It’s widely viewed that the nation’s new government will take a hard look at how the finance ministry interpret these kinds of financial reports and want to find ways of measuring the country’s economic health more easily.

As it is, the recent data offered some relief from the gloomy global news emanating from abroad, and confirmed that Japan is second only to the United States in the world economy rankings.