Big trouble in little Japan

Last quarter’s unexpected slowdown is a symptom of larger problems with global growth

Investors accustomed to focusing on the domestic causes of Japan’s decades-long funk should look more widely to understand the current slowdown. It is a symptom of global issues, not just the country’s struggles with an aging population and stagnant wages.

The world’s third-largest economy was enjoying its longest growth streak in 28 years until last quarter, when it came to an abrupt end with a 0.6 % decline in annualized GDP.

The drop adds to growing evidence that weakening global growth is a bigger problem than most investors would have believed just a few weeks ago—and raises questions over still bubbly Asian and U.S. stock valuations.

The slowdown in Japan’s economy last quarter was accompanied by the biggest drop in factory utilization since early 2016

Japanese companies may look healthy enough—last quarter’s aggregate operating margin for the manufacturing-heavy Nikkei 225 index was the highest this century, according to FactSet. Private, non-residential investment, though, has come to a shuddering halt, ending a positive streak that dated to mid-2016. It dipped an annualized 0.3% last quarter, after 2.6% growth in fourth-quarter 2017.

The likely reason is that Japanese factories suddenly aren’t running quite as hot: Capacity utilization fell nearly 2%, the biggest drop since early 2016. It coincides with sudden weakness in factory activity in China, where industrial-capacity utilization fell 1.5 percentage points last quarter, the first dip in two years, and in the Eurozone. Factory-run rates there have dipped in the second quarter, according to the European Commission.

Japan’s export engine is also lugging. Exports in both February and March were up less than 3% from a year earlier in real terms, according to the Bank of Japan—slowing from an average 7% pace over the previous half year, although April data improved a bit. And, once again, Japan isn’t alone: Chinese and Korean exports have also been weak in recent months.

Japan is also getting squeezed by rising oil prices—again, in step with many Asian trade titans. Its fuel-import bill hit JPY 4.7 trillion (USD 43 billion) in the first quarter, the highest since early 2015.

The good news is that if the dollar keeps strengthening—as slowing global growth and rising U.S. interest rates suggest it might—that will eventually help Asian exporters, including Japan. The bad news is that for now, Japan and its peers are being hit with a double whammy of rising oil prices and slowing global-demand growth, especially from Europe.

Long thought to be a victim of its own special problems, Japan is now suffering the same spring cold affecting the rest of the world.