Trailing Stop Order – What Is It and How Does It Work?
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Japan’s GDP dropped by 6.3% in the final quarter of 2019. It was the largest decline of the last five years. The Tokyo administration has a lot to answer for, since this extraordinarily high figure is in large part due to political reasons.
The Japanese government tightened their fiscal policy in October of 2019, which had a notable impact on the rest of the October to December quarter. Not only did they raise taxes, but they raised the single most high-impact tax: the Value Added Tax (VAT). The VAT functions similarly to a sales tax and raising it from 8% to 10% affected 90% of retail products. Their goals were to meet their inflation target and presumably to increase government revenue.
One of the most severe consequences of a VAT hike is that it negatively affects consumption. It puts businesses in an unfortunate situation where they would need to raise prices, but can’t do it out of fear that demand for their products would decline. Because they’re unable to pass the tax hike on to the final consumer, they’re forced to build it into their existing pricing strategy which cut sharply into their profit margins. The resulting poor business performance also had a strong adverse effect on the country’s GDP.
Private consumption dropped by 2.9% in Q4. The decline exceeded market and government predictions by approximately 1%. Private consumption makes up 60% of the country’s GDP, which was definitely taken into account when calculating their GDP forecast. Although the decline did not come as a surprise, the original expectation was a drop of only 4%, meaning the Japanese government underestimated the significance the diminishing private consumption would have on GDP and vice-versa. It shows that the population of Japan turned out a lot more price sensitive than they assumed. The population was used to mostly stagnant and in some cases declining prices, which has become one of the key characteristics of the Japanese economy. They’ve been fighting against deflation for several decades now and at this point it seems not even a tax hike would help. The Bank of Japan’s target inflation rate is 2%, however, over the course of Q4 2019 their inflation only rose from 0.2% in October to 0.8% in December. The slight increase in inflation prices that their efforts weren’t completely fruitless, however, whether it was worth the effort remains an open question.
The other possible reason for their downwards spiral is the machine industry, which has historically been one of the key engines of Japanese economic growth. Core machinery orders dropped by 3.5% from November to December, which is especially devastating when compared to the high growth in the previous month.
The combination of these two factors puts a lot of pressure on Prime Minister Shinzo Abe’s administration. The Bank of Japan (BoJ) also released a statement stating that they’ve taken every possible measure within their means to improve liquidity, including a negative base interest rate and a quantitative easing program. They went on to say that the inability of Japanese businesses to capitalize on the favorable monetary conditions was primarily due to factors outside of the BoJ’s control. Their statement made it clear that the only way to achieve the desired results would be through significant changes in fiscal policy. Coincidentally, this sentiment was mirrored almost verbatim by Mario Draghi, the former President of the European Central Bank, who faced similar issues during his tenure in the ECB.
It’s fascinating to observe that while central banks are in Europe and Japan are in a strong enough position to try and make demands of their respective governments, the current US administration’s relationship with The Fed is the inverse of their overseas counterparts. President Trump is known for his vocal criticism of Fed Chair Jerome Powell, as well as his attempts to indirectly pressure The Fed into enacting policies that further his goals for the US economy. The question for Europe and Japan is whether or not they would benefit from having a Trump-like figure in the government, actively trying to push the central banks into pursuing policies that align with their respective governments’ economic goals as well.
That leaves us with only one question: what macroeconomic results will we see from Japan in the first quarter of 2020? So far it’s shaping up to be a difficult year because of the loss in revenue from setbacks in production and tourism due to the coronavirus. Meanwhile the Japanese government is focused mainly on the upcoming Olympics, which is not necessarily a bad strategy. If the event is successful, it could give the Japanese economy some momentum and save the country from a potential recession.