Asian stockmarkets dropped yesterday, driving the region's main index to a two-year low, after Japan's economy contracted and companies reported weaker profit growth.
The Japanese slowdown, the Chinese bear market, more write-offs in the US banking industry and poorly received profits in Australia were the main drivers behind a sharper than expected loss across the region yesterday.
The slowdown in Japan was driven in the main by contractions in exports and home building. It's a clear sign that the slumping US economy has had a direct knock on impact on Japan.
Japanese exports to the US have been falling now for 10 months, and in the past couple of months, they have also lost their growth drive into Asia and emerging markets.
Cars, computers and capital equipment shipments across the Pacific to the US have fallen sharply in recent months as the US recession has rolled on.
The yen rose to a 12-week high against the euro after the report on the economy, with the currency hitting a two year high against New Zealand's dollar and the highest in four months against the Aussie currency.
The yen also advanced for a third day against the US dollar after hitting a five and a half month high on Tuesday.
Japanese investors are unwinding so-called carry trades as they quit higher yielding positions in assets in currencies like the Australian and NZ dollars.
The Yen is one of the few currencies the US dollar hasn't made headway against in its recent rise, which has seen it make big gains against the euro, the NZ and Aussie dollars and sterling.
It picked up yesterday with the news of the contraction in the second quarter, an announcement that saw the Nikkei lose around 2% as other markets across Asia fell. The Australian market also lost around 2%, despite solid profits announced by Telstra and the Commonwealth Bank.
The Japanese economy contracted 0.6% in the June quarter compared with the March quarter when it rose a revised 0.8% (down from the 1% previously reported). That put growth at an annual minus 2.4% compared to the revised 3.2% expansion in the first quarter.
It joined the US, Canadian, Danish, New Zealand and Italian economies in reporting a quarter of contracting growth: the US contracted in the 4th quarter of 2007 on the basis of revised GDP figures issued last month. New Zealand is heading to the dubious honour of a second quarter of contracting growth in the June quarter.
The MSCI Asia Pacific Index fell 1.3% to the lowest level since September 2006. The Index has fallen 20% this year as accelerating inflation and slower growth had undermined regional economic growth.
That puts the Asian region in a bear market: Japan, Hong Kong, Australia and China are already there.
China's CSI 300 Index slipped 3.1%% at one stage as the value of stocks traded on the two primary exchanges yesterday fell to the lowest since November 2006.
But the markets recovered the losses to close little changed after the afternoon rebound
China's market has now fallen more than 9% since the Olympic Games started last Friday.
All other indexes in the region fell.
Japanese exports fell the most since the 2001-2002 recession, while record fuel and food prices cut consumer spending and retail sales, while housing contracted.
The Japanese government last week described the economy as "weakening'', language it hadn't used since 2001.
Rates can't rise to fight inflation (which is running at a 27 year high for wholesale inflation of 7.1%). Falling oil and petrol prices will bring some relief from this month onwards, which will provide some help to hard-pressed consumers.
Exports slumped 2.3% in the quarter, the first drop in three years imports.
Consumer spending, which accounts for more than half of the economy, decreased 0.5% from the previous quarter.
It is not a recession though, as that is two consecutive quarters of negative growth, a common definition of a recession.
Some analysts reckon the economy could rebound weakly to just above break-even this quarter.
The impact of the export slowdown was shown with Japan's current account surplus which fell by a record amount in June as exports fell and higher oil prices pushed up the import bill.
The surplus dropped a huge 67.4% to 493.9 billion yen ($US4.5 billion) from 1.52 trillion yen a year earlier.
The Ministry of Finance said exports fell 1.5% in June from June 2007, the first fall since November 2003. Imports rose 17.8% to a record 6.59 trillion yen. As Japan imports virtually all of its oil, the surge in crude oil prices hurt the country in the month.
The higher import and energy costs were reflected in the 7.1% rise in wholesale price inflation in July, a 27-year high.
The surplus was boosted by returns on investments made overseas.
But some of those are currently being unwound as the carry trade is curtailed.
The difference to China is quite stark: consumer price inflation is easing in China, but wholesale prices are rising: exports are still growing, retail sales surged last month, but imports are growing rapidly.
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