Japan picture

                Japan reported a 2.3% contraction in its economy during the fourth quarter.  This comes as the third contraction in the last four quarters, a worrisome sign for its economy and chances for a double dip.   Floods in Thailand hurt production and a strong yen are the main sources for its GDP miss.  Exports were down 3.1% on a stronger yen as governments around the world were unwilling to pay a higher premium for goods.

The Bank of Japan concludes a two day meeting on Tuesday to decide what monetary easing policies should be used to help save Japan’s delicate economic state.  Bank of Japan Governor, Masaaki Shirakawa commented that Japan’s economy was in a “severe state”.

Analysts were expecting only a contraction of 1.3% but Japan reported a 2.3% contraction.  However, the report exposed many other unflattering numbers.  Private inventories fell 0.3%, public investment was down 9.5%, the yen hit its highest level since the end of World War 2, and 2011 was Japan’s first trade deficit in 31 years.  These are all very awful signs that could be pointing towards a double dip recession.  Japan is having a hard time recovering from the tragic earthquake back in 2011 and it is certainly taking its toll on the economy.

Executives from Toyota and Nissan say that it is near impossible to export cars and make money at this exchange rate.  The carmakers express that tough times may be ahead as they cut forecasts and earnings projections.

However, there are signs that the worst may be over and Japan could be starting off a recovery.  For one thing, analysts see full year 2012 GDP coming in at 1.7% on a stronger US economy and getting its act together by easing its currency and making exports cheaper.  Another good sign is machine orders were up 10% in October to December, making analysts believe Japan could be returning to industrial production levels prior to the earthquake.  Analysts believe a rise in investment could help boost the economy in the coming year.

If you are a contrarian investor, then Japan may be the investment for you.  Clearly times are tough but if the analysts prove to be right, you could be sitting on a gold mine.  Conversely, if the Bank of Japan fails to keep the economy in check and ease its currency then this recovery scenario could prove to be just a bunch of high hopes.