Japan in Recession, China Launches Stock Connect

Japan in Recession, China Launches Stock Connect

It is a total failure of Abenomics, the series of economic stimulus measures launched by Prime Minister Shinzo Abe to fight deflation and revive the Japanese economy at the same time. The Japanese GDP, contrary to analysts’ expectations, was down 1.6% year on year in the July-September quarter, compared with the 2.1% growth expected after the crash and 7.3% in the second quarter.

Two consecutive quarters of negative growth imply the condition of a technical recession. On a quarterly basis, the decline was 0.4%. As instant reaction on the currency market, the dollar has experienced a new record in seven years against the yen, jumping up to 117.04, the highest level since October 2007.

The Nikkei index of the Tokyo Stock Exchange has slipped by almost 3%. “This is definitely not a situation where we should continue to discuss an increase in interest rates on consumption – said in an interview with Reuters Etsuro Honda, university professor and Economic Advisor to the Prime Minister Abe – “The debate should focus on how to support the Japanese economy.”

And in fact the government led by Abe has decided to give the increase in VAT. For Yoshito Sakakibara, executive director of the division of investment research at JP Morgan, noted that as a rule “the first estimate of GDP is far from reality, especially for the fact that we still have the components to properly evaluate the capex, which had a very sharp decline. Therefore, we have to wait for the second estimate of GDP. But the first impression is that the economy is so weak it’s shocking.”

The Japanese government today released data from the third quarter of 2014 related to economic growth, reflecting a decline in GDP of 1.6% on an annual basis.

After last quarter’s GDP was down to 7.3%, the Empire of the Rising Sun is technically in recession. Despite authoritative publications such as the New York Times that have pointed out that this finding risks to turn into a real political earthquake that can endanger the very survival of the government of Shinzo Abe, Prime Minister stated that he will “evaluate coldly” the next steps. Statements that do not prevent, however, a succession of increasingly insistent rumors about the near dissolution of the lower house and new general elections on 14 December.

The economic situation is aggravated by a giant public debt the Japanese empire (GDP ratio reaches 230%, the highest in the world) to be added to a modest economic growth, a weak currency (the yen to minimum of 7 years on the dollar) and a level of taxation that continues to grow. Families are scared, consumption and investment fall, struggling businesses crave investments. The announcement by the Prime Minister Abe of the increase in VAT, which should rise from 8% to 10%, is much speculated upon.

Meanwhile, China inaugurates the great works in the financial sector, with the launch of the ambitious project of a stable connection between the Hong Kong Stock Exchange and the Shanghai stocks. As reported by the Chinese agency Xinhua, the president of the Stock Exchange of Hong Kong Chow Chung-kong said that “this is an important step in the process of opening up China’s financial markets and an important milestone in the development of Hong Kong as a bridge between the mainland and international investors.” Satisfaction was also expressed by the Chief Executive of Hong Kong CY Leung, who stressed that the alliance will bring more competitiveness in both financial centers.

Investors or companies with at least 500,000 yuan in their brokerage account will handle shares of Hong Kong companies on the Shanghai market, through the mediation of a broker. In contrast, Chinese and international investors will be able to deal with Hong Kong stocks listed on the Shanghai market. The new financial platform has already been dubbed “Super Stock Exchange of China”; with the aim in the future to extend the new arrangements also to the stock exchange in Shenzhen.

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