Weak global demand undermines Japan's shaky recovery

The turmoil in equity and commodity markets may seem like a distant storm to some in Japan. But it poses a very present danger to the nation's external-demand-dependent economy.

"In China, our situation is about trying not to lose money rather than making money," confides Mikio Ide, president of Sumitomo (S.H.I.) Construction Machinery.

The manufacturer, whose products include excavators and asphalt pavers, expects to build only about 1,000 machines in China in fiscal 2015, 40 per cent fewer than predicted in a medium-term plan.

Nearly three years have passed since Japanese Prime Minister Shinzo Abe's comeback set in motion a twin trend of rising equity prices and a falling yen. With the markets now in flux, it bears taking another look at the strength of Japan's economic recovery and the risks it faces.

Listed Japanese companies' pretax profits rose 24 per cent on the year in the April-June quarter, hitting a new high. SMBC Nikko Securities reckons that a weak yen contributed 8 percentage points of this growth. The Japanese currency traded at around 122 yen to the dollar at the end of June, 20 yen weaker than a year earlier. Over the past three years, 60 per cent of Japanese profit growth owed to "tailwinds," such as fiscal spending and a corporate tax cut, estimates Masanobu Kaizu, senior research fellow at Nomura Securities. Only 40 per cent resulted from companies' own efforts, he says.

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