There was a large hue and cry about the recently announced Japanese GDP statistics that indicated that the country was in a recession. There are three important things to know about this, however...
1. Firstly, these statistics often get heavily revised and it would not be shocking to see the most recent quarter revised up into positive territory, especially as there were several anomalies in the data.
2. Secondly, GDP statistics have no correlation with corporate profits in Japan. As our Evolving Markets reports have long-shown, despite lackluster GDP, Japanese corporate profits have been quite strong in the last 10 years. Indeed, in the last two quarters of this supposed recession, Japanese corporate profits have surprised sharply to the upside and grew about 10% year on year; hardly an indication of crisis. Of course, the weaker Yen played some role in this, but service sector profits, including among banks, also surprised to this upside.
3. Thirdly, there are manifold indications that the calendar fourth-quarter's economy will rise significantly as machinery orders and personal consumption remain on an upward track. Meanwhile, if this recent GDP data leads to further yen weakness, such would also be supportive of the economy.
The political aspect of these numbers however, is more significant and will likely cause the consumption tax hike to be postponed. This is positive news in the short run, as it will allow the economy to grow and the wealth effect to spur future consumption.
It will also likely lead to new elections which should bolster the Abe administration's hold on power for the next few years and, thus, bolster his ability to reform the economy. In particular, this should increase his ability to push through an agreement on the TPP, which is a badly needed development for Japan.
In sum, the bad economic data should not worry investors in Japanese risk assets very much at all.