Q4 2012 was characterized by the depreciation of the yen and the rise in stock prices, in anticipation of a change of government. This led to a substantial improvement of the private sector balance sheets.
According to the Flow of Funds, net lending of the private sector has fluctuated around 9% of GDP in recent years. The reluctance to spend is the main reason why the economy has failed to come out of deflation.
The challenge for the Abe government is to make the current recovery self-sustained. This would require the private sector becoming the main growth engine.
In Q4 2012, the Japanese economy came out of recession as GDP rebounded by 0.3%. An important factor was the announcement of Prime Minister Noda to organise an early election for the Lower House of Parliament in December. This ended the opposition’s obstruction to approving the funding law in the Upper House. It also opened the perspective for regime change. According to the opinion polls, the Liberal Party of Japan (LDP), which campaigned on a platform for ending deflation by more fiscal and monetary accommodation would gain the election. The opinion polls proved to be right. The LDP won a landslide victory and its leader Shenzo Abe became the new Prime Minister by the end of December.
Financial markets did not wait for the election results. The anticipation of aggressive fiscal and monetary easing provoked a sharp depreciation of the yen (Chart 1). Between the announcement of the election and the end of 2012, the Japanese currency had lost 9% against the dollar and 14% against the euro. At the same time, stock prices started to rise. The Nikkei 225 gained almost 23%. Compared to the volatility on the foreign exchange and stock markets, the bond market was a rather tranquil spot. The yield on the benchmark 10-year JGB gained only 5 basis points between the announcement of the election and end 2012. However, the yield was 160 bp lower by the end of Q4 than at the start of the year.
Private sector balance sheets strengthened further in Q4
The most eye-catching change in the Flow of Funds is the deterioration of financial surplus of the financial sector in H2 2012, largely due to the pension and insurance sector (Table 1).1 However, this reflects the way the Flow of Funds accounts are set up rather than a worrying trend. In these accounts, the reserves of the pension and insurance sector are defined as the present value of the policy holders’ claims. These substantially increased in 2012 due to the decline in interest rates.
BY Raymond VAN DER PUTTEN
To Read the Entire Report Please Click on the pdf File Below.
According to the Flow of Funds, net lending of the private sector has fluctuated around 9% of GDP in recent years. The reluctance to spend is the main reason why the economy has failed to come out of deflation.
The challenge for the Abe government is to make the current recovery self-sustained. This would require the private sector becoming the main growth engine.
In Q4 2012, the Japanese economy came out of recession as GDP rebounded by 0.3%. An important factor was the announcement of Prime Minister Noda to organise an early election for the Lower House of Parliament in December. This ended the opposition’s obstruction to approving the funding law in the Upper House. It also opened the perspective for regime change. According to the opinion polls, the Liberal Party of Japan (LDP), which campaigned on a platform for ending deflation by more fiscal and monetary accommodation would gain the election. The opinion polls proved to be right. The LDP won a landslide victory and its leader Shenzo Abe became the new Prime Minister by the end of December.
Financial markets did not wait for the election results. The anticipation of aggressive fiscal and monetary easing provoked a sharp depreciation of the yen (Chart 1). Between the announcement of the election and the end of 2012, the Japanese currency had lost 9% against the dollar and 14% against the euro. At the same time, stock prices started to rise. The Nikkei 225 gained almost 23%. Compared to the volatility on the foreign exchange and stock markets, the bond market was a rather tranquil spot. The yield on the benchmark 10-year JGB gained only 5 basis points between the announcement of the election and end 2012. However, the yield was 160 bp lower by the end of Q4 than at the start of the year.
Private sector balance sheets strengthened further in Q4
The most eye-catching change in the Flow of Funds is the deterioration of financial surplus of the financial sector in H2 2012, largely due to the pension and insurance sector (Table 1).1 However, this reflects the way the Flow of Funds accounts are set up rather than a worrying trend. In these accounts, the reserves of the pension and insurance sector are defined as the present value of the policy holders’ claims. These substantially increased in 2012 due to the decline in interest rates.
BY Raymond VAN DER PUTTEN
To Read the Entire Report Please Click on the pdf File Below.