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What’s Going On Over In Japan’s Economy and Stock Market?

Japan’s financial markets and economy seems to be going through a roller-coaster these days with some serious twists-and-turns. As of October 2014, there are 14 shares listed in Singapore which have at least a fifth of their revenues coming from Japan and they include Global Logistic Properties Ltd (SGX: MC0) and Accordia Golf Trust (SGX: ADQU).

Investors in shares with a strong exposure to Japan might want to keep up to date on what’s happening there, so let’s walk through what has been going on thus far.

Announcement of expanded stimulus programme

On 31 October 2014, the Bank of Japan made a surprise announcement that it would be injecting 80 trillion yen annually into the Japanese economy through the purchase of bonds. In addition, the central bank would also boost investments in Japanese exchange-traded funds and real estate investment trusts.

On the day of the announcement, Japan’s Nikkei 225 market index (Japan’s equivalent of Singapore’s Strait Times Index (SGX: ^STI)) jumped almost 4% to 16,414 points. Since then, the Nikkei has climbed a further 5.4% to 17,301 points as of yesterday’s close.

Japan in recession

In September, Japan’s economic revival under Prime Minister Shinzo Abe seemed to be faltering after news broke that the country’s economic output had contracted by a sharp 7.1% in the second quarter of 2014. This negative growth had been believed to be a big reason behind the Bank of Japan’s aforementioned expanded stimulus programme.

Then, on 17 November 2014, the Nikkei 225 fell by 2.96% in a single day after third-quarter data revealed that Japan had entered into a technical recession after suffering two consecutive quarters of negative growth.

Snap elections

The news of the recession was a like a bombshell to many as analysts were expecting that the Japanese economy would grow in the third quarter of 2014. But as we know, there was no growth. The third-quarter-contraction could mainly be attributed to the hike in sales taxes from 5% to 8% which was enacted in April. With the impact of the increase in the sales tax being much more severe than expected, Abe has the wish to delay next October’s planned sales tax hike from 8% to 10% to April 2017.

With all the above as a backdrop, Abe also called for a snap election to take place in December. According to the Wall Street Journal, the election “will likely be a referendum” for Abenomics, which is the popular term used to refer to Abe’s plans to rejuvenate the Japanese economy.

How it may affect other countries like Singapore

If the contraction in Japan’s economic output is set to persist over the long run, it might slow global economic growth because Japan is a large importer of global output. Investors in Singapore-listed shares with big exposure to Japan – like the aforementioned Global Logistics Properties and Accordia Golf Trust – would likely be negatively affected by this turn of events in Japan, although each individual company may also have very different reactions to changes in the Japanese economy.

In any case, Japan’s recovery still remains a question mark though one thing seems clear: Abenomics would likely continue for Japan in a bid to stimulate the country’s economy.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.