14 February, 2008

Decoupling in Japan?

Surprisingly strong fourth quarter GDP results for Japan combined with better than expected U.S. retail sales figures led to the largest single day rally in the Nikkei 225 index in 6 years. The robust GDP figures were credited mainly to a boost in exports to emerging markets, particularly in Asia. Given the traditional reliance on the U.S. market (which remains the single largest consumption market in the world) for most of Japan's exports, economic deterioration in the U.S. had been weighing on Japan's growth prospects for some time already, ever since the subprime crises unfolded.
Emerging economies, in recent years have benefited from more disciplined fiscal and monetary policies that have led to strong growth, an accumulation of reserves, low debt and a greater ability to withstand a marked slowdown in the U.S. than at any other time in history. The Japanese export market seems to have benefited from these structural changes. Risks of contagion remain, however, in the event that the U.S. enters a protracted slowdown or even a recession. Such a scenario would weigh heavily on exports that many emerging markets (most notably China and India) depend on. This would have a cascading effect on developed markets such as Japan that increasingly relies on the fortunes of its neighbors.

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