Christopher Mahon, Director of Asset Allocation Research at Baring Asset Management, comments on how Japan’s economy unexpectedly shrank for the second consecutive quarter and is now in a technical recession:
“In Japan, corporate earnings continue to do well and have been able to shrug off the weak domestic data coming from Japan over the summer. This resilience is in marked contrast to say, Europe, where earning expectations continue to move down. The robustness of profitability is due to the boost in margins driven by the weak Yen – a relationship that we expect to continue.
“Nonetheless, given the weak economics within the government, a debate is taking place on when to introduce an additional VAT increase for the second time. We believe this is looking less likely and this will need to be postponed, unless implemented together with tax reforms to ease the burden for the corporate sector.
“We think that this will be a key decision for the evolution of Japanese economic growth for the next six to 12 months and there should be greater visibility on the sales tax in early December and that the underlying profitability trend in Japan should continue to rise.”