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Sunday, April 20, 2003

Nikkei Back Down Below 8,000


In a sign of what may be in store for the post-war equity markets, the Nikkei fell below 8,000 today. With worries about Sars rising, Europe full of euro-related low groth problems, and the US job and profitability situation all focusing attention, it's hard to see a strong rally any time sooon. God, I can still remember that it was only March last year that we were all saying 10,000 would be a tipping point. Now it's down to 8,000 and heading South. Still, there will be a tipping point in there somewhere, the difficulty is only in identifying it.

The benchmark Nikkei average fell below the key 8,000-level in midday trade on Thursday, on continuing fears regarding the state of the global economy in the wake of the Iraq war.The benchmark Nikkei 225 fell 1.4 per cent to 7,941.96, while the broader Topix index was down 1.3 per cent to 790.76.Stocks were broadly lower, with Sony hitting a four-year low in intraday trade, on concern that Japan�s biggest exporters may feel the effects of a global economic slowdown following the Iraq war. Sony�s shares were down 3 per cent to Y3,900 in midday trade, a level last seen in January 1999. Downward pressures on blue chips. were exacerbated by corporate pension fund selling.
Source: Financial Times
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Reform at the Bank of Japan?


The BoJ has decided to proceed with its plan for buying asset-backed securities (ABS's) in particular by buying securities from small and medium-sized enterprises, and to conduct this activity as a routine part of its monetary operations - even if only on a temporary basis - over the next few years. This was decided at the 7, 9 April meeting by a majority vote of 8 to 1. This initiative aims to provide smoother financing to Small and Medium Enterprises (SME's) by purchasing securities based on sales receivables and other assets. According to the bank, the objective is to strengthen the effects of monetary easing by nurturing the development of tan assett backed security market, thereby making available investment funds to smaller enterprises. The big questions, of course, concern whether this will really have any impact, either in facilitating the growth of newer, more dynamic enterprises, or in the more general area of increasing liquidity to provoke inflation. Morgan Stanley's Takehiro Sato has plenty of doubts:

The bank�fs decision to purchase private-sector debt, rather than government debt, itself appears to be a major policy shift. Governor Toshihiko Fukui is pursuing involvement in corporate financing to enhance the quality of liquidity supply after seeing the limited effect of quantity expansion promoted by former Governor Masaru Hayami. A key premise for purchase operations of such risk assets to be effective, however, is a market with sufficient size and liquidity. Yet the ABS market is still in its infancy and lacks adequate outstanding value and liquidity, particularly for SME securities, and transaction price transparency. Furthermore, the bank intends to purchase ABS backed by the assets of SMEs with credit standing comparable to �gnormal�h in bank self-assessments. This requirement can be expected to limit the scope of ABS eligible for BoJ purchase operations and may make the policy initiative effectively meaningless.........

It is likely to be confirmed that these operations will not make a quick contribution to SME financing. However, the BoJ decision to move beyond the eligible collateral level and involve itself in corporate credit has created the possibility of more direct financing to corporations over the medium term. For example, the Bank is already considering purchase operations for not only senior securities but also the mezzanine segment. If this happens, credit standing for eligible collateral and purchased assets may be reversed in some cases, similar to the situation with bank equity holding standards. Future policy developments might therefore lead to a relaxation of eligible collateral criteria in order to maintain policy coherence. Easier eligible collateral criteria could enable banks to underwrite corporate CP and improve funding. Yet this is likely to reduce the chance of corporate liquidity failures in the same way as recent quantitative easing measures. In other words, reinforcement of the safety net for non-financial corporations, in addition to banks, could postpone the shakeout and reorganization process and allow financial socialism to make further inroads.
Source: Morgan Stanley Global Economic Forum
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Japan's Continuing Economic Crisis

One day or another Japan unfortunately is going to burst. Left on its present course, like the proverbial nineteenth century steamship with the boiler overheating, one day one too many of the bolts will sheer off, a boiler plate will give and then the devil take the hindmost. Of course one of the few debateable points remaining is whether or not there is really anything left to be done. Common sense says there is, and sheer humanity says that there ought to be. Recognising this is the easy part. The tricky bit is what to do. Ten years of sustained problems, various recessions, and the outbreak of what may be regarded as the developed world's first serious bout of sustained deflation have left little doubt about the depth and seriousness of what is taking place.................

In general terms, one of the problems with the whole Japan debate is that much of the available material fails to tackle the problem head-on. For instance the well-publicized Federal Reserve research report "Preventing Deflation: Lessons From Japan's Experience in the 1990s" rather surprisingly fails even to consider one of the most important factors which may be driving the Japanese deflation: DEMOGRAPHICS. This lacuna is not an isolated case. Even where the problem is mentioned, it is normally not explored.


So all of this is a bit like Hamlet without the prince. Little of the more fashionable analysis really helps us understand why Japan government debt is growing out of control - after all with deflation abounding, even government supplied services should get cheaper, and why raising interest rates at any point in the foreseeable future is going to be difficult. This is because many of the arguments rest on the assumption that eventually Japan will solve the slow growth problem and start to recover. Well, I'm afraid I wouldn't be too sureabout that. And if the problem is a faulty diagnosis, then how the hell do you expect the medicine to work............

As Robert Lucas among others has indicated, classical economists like Malthus and Ricardo saw the need to account for the dynamics of pre-modern societies, and in particular for the fact that in these societies per capita incomes normally did not increase, but rather tended to return to roughly constant levels despite technological improvement, as one of the central problems facing economic theory. Differences in ability to produce had the knock-on effect of leading to differences in population level, and not to differences in living standards. This static situation constituted what has become known as the Malthusian trap. With the coming of industrial society something new happened, we broke out of the trap. Population increased, but at the same time per capita incomes also continued to increase, systematically, and as never before in history. This 'modern era' has now lasted for around 200 years.


However, the signs are there that things are changing. We still continue to increase living standards in an unprecedented way, but planetary population is getting older, and soon, in some 33 developed countries according to the recent UN population revision, smaller. It seems we are once more in danger of falling into a population trap, one where population and economic growth again become ensnared, but this time in a downward spiral. Economic theory to date has notably and monumentally failed to come to terms with the implications of this change, and herein lies the significance of Japan.
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Monday, April 07, 2003

Japan a Lost Decade


A number of hypotheses have been presented to explain Japan's continuing economic failure since the beginning of the ninetees: inadequate fiscal policy, the liquidity trap, depressed investment due to over-investment during the "bubble" period of the late 1980s and early 1990s, a broken banking system due to a combination of the former, outdated labour market and work practices, growing competition from China, and (my own strong hypothesis, of course) demographic processes. While we have many hypotheses, we have, as yet, no coherent and compelling account. The Hayashi and Prescott paper examines the history of the "lost decade" using a standard neoclassical growth model. It identifies finds two developments which seem to be important for understanding the Japanese economy in the 1990s. First and most important: there was a fall in the growth rate of total factor productivity (TFP). This, argue the authors, had the consequence of reducing the slope of the steady-state growth path and increasing the steady-state capital-output ratio. Their most important finding: that the drop in the rate of productivity growth alone cannot account for the near-zero output growth in the 1990s.

Abstract
Japan a Lost Decade: Fumio Hayashi and Edward Prescott

This paper examines the Japanese economy in the 1990s, a decade of economic stagnation. We find that the problem is not a breakdown of the financial system, as corporations large and small were able to find financing for investments. There is no evidence of profitable investment opportunities not being exploited due to lack of access to capital markets. The problem then and still today, is a low productivity growth rate. Growth theory, treating TFP as exogenous, accounts well for the Japanese lost decade of growth. We think that research effort should be focused on what policy change will allow productivity to again grow rapidly.
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Japanese Saving Moves Towards Negative Territory


I'm really not sure what importance to put on this, but it does seem in line with the idea that demographics, and the life cycle model, have something to say about what is happening in Japan. It seems to fit my picture nicely, which is why I'm cautious. There isn't going to be anything to cheer about here.

Despite a worsening income environment for employees, personal consumption has held up pretty well. Nominal employee compensation in calendar 2002 shrank by 2.4%, but nominal consumption was flat or up 1.5% in real terms. This has resulted in a notable decline in the rate of household savings. The household savings rate fell from the 14% range at the start of the 1990s to around 10% in the late 90s, and to 6.9% in 2001. Figures for 2002 are not yet available, but judging by the relevant data, we estimate that it slipped still further to about 4.3%. The savings rate based on sequential quarterly data (the 4-quarter moving average) has dropped even more startlingly. After dipping below 10% at the start of 1996, declines accelerated from 2001 to 4.7% in January-March 2002, the most recent period that can be calculated. Our estimate is that this figure was down to about 2.5% for October-December 2002, and that a negative savings rate is a possibility soon. This could happen within a few quarters, under our assumptions of an ongoing decline in disposable income and flat consumption.

Normally, the savings rate tends to rise during an economic recession, due to the tendency to suppress consumption amid rising uncertainty. Further, deflation is known to stimulate demand for bank notes and cause expenses to be put off. The classic business cycle theory suggests that the savings rate should now be rising. This makes the actual declining trend all the more alarming. We attribute this decline to (1) growth in the generation that is tapping into assets, a result of the aging of society and the increase in unemployment among older workers (the life cycle hypothesis); (2) reduced incentives to save and a growing preference for durables, due to extremely low interest rates; and (3) due to the difficulty in reining in spending after becoming accustomed to a certain level, spending is cut back, but not by enough to offset the decline in income (the habit-formation hypothesis).

Regarding (1) above, we assume the following age/life-cycle influenced consumption/saving pattern is in effect: consumers borrow when they are young and their incomes are low, save in preparation for old age in mid-life, and live off what they saved in their retirement years. The increase in unemployed older workers has played a substantial role in the decline in the savings rate in recent years. The savings rate for unemployed older workers stands at -26.0%, making it clear that savings are being drawn upon. On top of this, the decline in the savings rate resulting from the increase in unemployed older workers, in addition to being grounded in a long-term trend caused by the aging of the population, has been further exacerbated by earlier retirement age, early retirement programs and the dismissal of older workers. The percentage of households headed by unemployed aged 60 and over is conspicuously trending upward, having increased from around 12% in the early 1990s, to 19.1% in 2000 to 21.0% in 2001 and to 22.0% in 2002. Japan's population is expected to reach a peak in 2006 and then began to decline, but the fact that savings have begun to decline ahead of the population suggests greater urgency.


Regarding (2), the view that extremely low interest rates have destroyed the incentive to save is further supported by recent consumption patterns, which show that the consumption of durable goods has remained relatively strong. One incentive for holding financial assets is the function they provide as a store of value and wealth, but it is conceivable that low interest rates have diluted this "store of value" function of financial assets and thereby increased the preference for real assets. This increased preference for durables, which also function fairly well as a store of value, as opposed to regular consumer goods, could be considered further corroboration of this hypothesis. It is interesting to note that this massive shift of funds in 2002, which was sparked by both implementation of a deposit insurance cap and disappointment in investment trusts with net asset values below initial investment amounts, coincided with the period in which the consumption of durable goods was robust.
Source: Osamu Tanaka, Morgan Stanley Global Economic Forum
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Japanese Intevene Heavily to keep Yen from Rising


The Bank of Japan intervened heavily in March, spending the double of what it spent in February. The only remaining question: just what would have been the yen/dollar rate without this intervention?

The Bank of Japan stepped up its efforts to prevent the yen strengthening in March, according to official data that confirmed traders' suspicions that the authorities had covertly intervened in the market for a third successive month. The BoJ said on Monday it spent a total of Y1,131bn ($9.5bn) in March through its foreign exchange account, which generally indicates foreign exchange intervention. In January and February, the bank spent Y678bn and Y513bn respectively.But strategists noted the money spent, believed to be mostly buying dollars for yen, had had little impact on the yen's exchange rate this year. The dollar ended 2002 around Y118.6 against the yen - almost exactly the level at which it was trading when the BoJ released its data on Monday.
Source: Financial Times
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Japanese Industrial Production Falls in February


Japan's industrial production fell 1.7 percent in February from a month earlier on a seasonally adjusted basis, preliminary data from the Ministry of Economy, Trade and Industry (METI) showed on Monday. That was worse than a median forecast of a 0.9 percent fall in a Reuters survey of 19 economists conducted last week. METI forecast manufacturers' output -- a key component and close proxy of industrial production -- would rise 2.8 percent in March and rise 0.2 percent for April The ministry kept its assessment of industrial output unchanged from last month, saying it remains on a weak trend.
Source: Forbes Reuters
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Nikkei Closes Year Below 8,000

It's not clear what consequences this will have, but it is certainly not good news.

Tokyo share prices fell below the 8,000 yen mark on Monday to close fiscal 2002's trading amid fears that the U.S. led war against Iraq will be prolonged.The sharp decline will certainly hurt the business results of many companies and commercial banks over the current business year, corporate executives fear. Firms are now legally required to report their assets' market prices, instead of face values, in their account books.The Nikkei Average of 225 selected issues on the Tokyo Stock Exchange (TSE) closed at 7,972.71 yen, down 307.45 yen from last Friday's closing index. This is the lowest closing price at the end of a fiscal year since March 1982. TOPIX, a broader index of share prices on the TSE First Section, also fell 29.92 points to 788.00 from last Friday's figure.
Source: Mainichi Shinbun
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Japan Deflation Continues


Despite the recent oil price rise, Japan just registered its 23 consecutive month of retail sales decline.

Japan's nationwide retail sales have fallen 0.2 percent in February from a year ago, their 23rd straight month of decline. The drop compares with 2.6 percent fall in January and a 3.4 percent decline in December, the Ministry of Economy, Trade and Industry (METI). A record high jobless rate and falling incomes have made consumers reluctant to spend, with war in Iraq adding to uncertainty.Sales at large retail stores in February rose 0.2 percent from a year earlier after falling a revised 2.2 percent in January. Department store sales were flat in February while supermarket sales grew 0.3 percent year-on-year, METI said. The ministry said sales of automobiles and oil-related products had supported overall sales, while those of clothes and personal computers declined.
Source: Channel News Asia
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BoJ Emergency Meeting Disappoints

The Bank of Japan, which met earlier today for an emergency session, voted to increase the purchase of shares from Japan's struggling banks, but stopped well short of taking the radical anti-deflation measures some had expected. The measures agreed upon fall far short of the 'unorthodox' measures that many have been calling for, and seem to cast rather a long shadow over the speculation that Fukui would be more radical than expected.

The central bank voted 7-2 to expand a scheme to buy shares from commercial banks to Y3,000bn from the previous Y2,000bn limit. It also said it would provide as much liquidity as the markets needed to counter any turbulence generated by the war in Iraq. Markets, which had stayed relatively firm in the morning session in spite of falls on Wall Street overnight, were disappointed. The Nikkei stock average, which has rallied over recent days, fell sharply on the BoJ announcement, closing down 2.3 per cent to close at 8,238.76. "These are just small steps within the current monetary framework," said Nobuyuki Nakahara, a former BoJ board member who advocates more radical anti-deflationary measures. "They do not represent the fundamental changes of policy that Japan needs."