Japan reported that its economy fell back into a recession after contracting an annualized 1.6% in the third quarter, representing the second straight quarter of contraction. Part of the blame will squarely lie with Prime Minister Abe and his controversial decision to raise the country’s sales tax from five percent to eight percent in April.
I consider the decision to raise the sales tax wrong, as it largely impacts the middle class and lower income brackets in Japan. The rich don’t care. (Sound familiar?) Worst of all, Abe cut taxes on big business instead. Currently, the sales tax is planned to rise to 10% in October 2015, but there’s speculation Abe will put a hold on this move.
The softness in Japan and the global economy makes it even more critical that Abe work toward a better relationship with Japan’s historical and current rival China. Japan already calls China a major trading partner in the global economy, but the numbers have been declining over the past few years, due to tensions between the two Asian powerhouses.
The problem is that China is also facing its own internal growth issues with the stalling in the global economy, along with concerns in the real estate and debt markets that could impact the country.
The reality is that slowing in China and Japan also impacts the rest of Asia and the global economy. Thailand, for instance, the second-largest economy in Southeast Asia, cut its gross domestic product (GDP) estimate to one percent for this year, down from the previous 1.5%–2.0% estimate, according to the National Economic and Social Development Board in Thailand.
In Asia, we are also seeing stalling in South Korea and the other emerging Asian economies.
Add in the GDP stalling in the eurozone and Europe, and you have a potential major slowing in the global economy that will inevitably impact our domestic economy. Germany and France, the two major pillars of strength in the eurozone, are showing some fragility.
The fact that the global economy is so interlinked means weakness in one region of the world will spread like a virus and impact other regions. No regions are immune to this risk.
So while things appear to be improving in the U.S. GDP, continued hardships in the global economy will make the situation much more vulnerable.
What I suggest is that you continue to take some money off the table. The U.S. stock market may advance higher, but there’s stalling in the global economy and we know no region is immune to a global business virus.
To hedge against the downside risk, investors can continue to use put options on their current holdings in stocks or indices.
This article is brought to you courtesy of George Leong.