GDP data released overnight showed a surprise contraction in the Japanese economy in the third quarter, meaning Japan has technically entered a recession, with two consecutive quarters in which the economy shrank.
Japanese GDP declined 0.4% in the third quarter, following a 1.9% decline in the second. Year over year, the economy shrank 1.6%. This underlines how hard the Japanese economy has been hit by the consumption tax hike that occurred in April – and reinforces speculation that Prime Minister Shinzo Abe will delay another such tax rise planned for late next year. By mid-afternoon in New York USD/JPY was up 0.15% at 116.47, having broken above 117.00 earlier in the session, reaching a seven-year high in the process.
Fears of a softening in global demand have largely arisen from events happening in Europe and China, but the surprise development of a Japanese recession (the consensus estimate had been for Japanese GDP to grow 0.5% in Q3) now adds further drag to the demand outlook, which has hurt the already-precarious oil market. US light crude oil futures slid 0.73% to $75.26 barrel. The extent to which crude prices have been falling heaps pressure on OPEC to alter output levels at a meeting scheduled for November 27.
He also gave an explicit clue that the ECB might purchase eurozone government debt as an additional measure if its current stimulus package does not prove effective, saying ‘Other unconventional measures might entail the purchase of a variety of assets, one of which is government bonds’ in order to achieve price stability. The euro plunged 0.60% against the dollar to 1.2452.
Mr Draghi’s words have provided encouragement to investors in the stock market, helping to offset some of the impact of the weak Japanese GDP data. By mid-afternoon in New York, the leading stock indices had recovered much of their earlier losses, with only the NASDAQ remaining in the red. The Dow Jones gained 0.09% or 15 points to stand at 17,650, while the S&P 500 inched 0.05% higher to 2040.8. With Friday’s closing level setting a new record for the S&P 500, any gain today would set a new closing record for the index.