The latest economic numbers from Japan have been pretty ugly.
GDP for the July to September quarter was recently revised down to an annualized 1.9% contraction rate from the previously reported 1.6% annualized contraction rate.
The main culprit for the downward revision was weaker than expected corporate capital expenditures, which contracted at a 0.4% rate compared to the previously reported 0.2% contraction rate.
Despite the great fanfare, Abenomics has been struggling. Japan is in technical recession, and analysts expect only moderate growth for the current quarter.
One reason for the sputtering growth is that Japan is trying to export its way out of its economic malaise at a time when the global economy is weak.
China has a decelerating economy. Europe is in danger of entering into recession. Both Brazil and Russia have to contend with falling crude prices.
Because the global economy (ex-U.S.) is weak, Japan's trade deficit is negative despite the depreciating Yen. That negative trade deficit, in turn, acts as an anchor that drags down Japanese GDP.
Another reason for the sputtering growth is Japan's 8% sales tax. To compensate for the weak international demand, Japan needed domestic consumer spending to increase significantly. Unfortunately, due to the April sales tax hike, consumer spending decreased substantially. The decreasing consumer expenditures further weighs on Japanese GDP.
With that said, even though the recent economic data from Japan have been terrible, there are several reasons to be optimistic about the Nikkei.
First, the sharp drop in crude oil (with Brent falling from $110 per barrel in August to $65 per barrel today) should act as a powerful stimulus to the Japanese economy. Japan imports roughly 3 million barrels of crude a day and spends over $100 billion in crude imports a year. Given that crude prices are now $45 per barrel cheaper than they were before, the fall in crude prices means that consumers will have $30-$50 billion more in discretionary income to spend. That extra discretionary income should improve consumer confidence and partially offset the negative effects of the April sales tax hike.
Second, the Japanese trade deficit should narrow and GDP should increase in 2015, as some of Japan's 48 nuclear reactors come online. Due to negative public opinion on nuclear energy after Fukushima nuclear disaster, all 48 of Japan's nuclear reactors are currently offline. Given that Abe will have more leeway after the election, many believe that Japan will turn on a significant percentage of its nuclear reactors beginning in 2015.
Third, if Shinzo Abe wins on December 14th, he will have a mandate from the Japanese people to do whatever it takes to get Japan out of its current economic malaise. A mandate will likely mean more fiscal stimulus and more QE from the BOJ, thereby leading to a higher Nikkei and lower Yen.
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