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Friday, October 31, 2003

Japan Pensions: Where is the Incentive?

It seems that, little by little, the world is waking up to the importance of all this. Last week it was the Italian Minister of the Interior, this week it is the director of economic policy in Japan's cabinet office. When I started blogging about this, just over a year ago, it was much harder to get a hearing. This change is positive. OTOH too many people are continuing to fool themselves by thinking of this as a linear process. Here, non-linearities will be everything. Two examples in the report: number one, is the cost of having children, and the inability of society collectively to address this because of the scale of the fiscal problem which already exists coping with the elderly. Secondly, young people are dropping out of the pensions system. It is logical: if you put more in than you are ever going to get back, where is the incentive?

Already mired in its worst economic slump in decades, Japan may well see its growth decline even further as its citizens age and its population shrinks, the government said in an annual economic assessment released Friday. The report suggested Japan needs to take stronger measures to encourage people to have more children, and to make its domestic markets more attractive to foreign investment. "Japan is experiencing aging unprecedented in history," said Jun Saito, the director of economic policy and analysis at the Cabinet Office, which authored the report.


Addressing the aging problem for the first time, the annual assessment noted the country's population between the ages of 16 and 54 has already started to slide and added that growing numbers of retirees are trimming the nation's huge savings pool. Economists say Japan's high saving rate was a major factor driving the country's rapid growth in the decades after World War II. The savings households deposited in Japanese banks provided a ready supply of capital that industry borrowed to invest in new plants and equipment. But today, Japan is a net creditor to the world and attracts little in the way of foreign savings - one source of funds countries often turn to when there is a shortage at home, Saito said.


Along with attracting overseas capital and raising labor productivity, the report stressed the need to help women have careers and children, instead of choosing one or the other. Saito said one option would be to set up more day-care centers, a step the government pursues now. The report said the average Japanese woman now faces incentives not to have children: She loses 85 million yen ($772,000) over her lifetime if she quits her job to give birth - even if she returns to work afterward.

Japan's birthrate - which measures the average number of times a woman gives birth during her lifetime - dropped to 1.32 in 2002, the lowest on record, and after peaking in 2005, the population is on track to shrink by nearly a fifth by 2050, the government says. The changing demographic is already straining the country's pension system, with the government forecasting those now in their 20s through 40s will pay more into the system than they will receive due to the large numbers of elderly the country will support in coming years. This is causing more young people to opt out of paying into the system, creating an additional burden on government coffers.
Source: Yahoo News
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Row Over Resona Bailout

This is obviously part of the backdrop to the election campaign, and it is always hard to judge the significance of things in this context. But Resona is interesting, since it is a strange case, and it could give us some clues as to the real determination for serious reform in Japan. On the face of it, not encouraging.

The Democratic Party of Japan, the country's main opposition, is accusing the government of Junichiro Koizumi of "state-sponsored window dressing and fraud" when it bailed out Resona, the Japanese bank. DPJ officials will meet representatives of the Financial Services Agency, the banking regulator, on Monday and will argue that the government was aware that Resona was insolvent when the FSA decided to inject Y1,960bn ($17.9bn) to prevent the bank collapsing. The opposition's decision to accuse the government of acting illegally escalates the potential political fallout from the Resona rescue and is designed to put pressure on the prime minister and his ruling Liberal Democratic party ahead of a general election in November.

The DPJ will argue that the government deliberately used an inappropriate clause of the Deposit Insurance Corporation law to avoid the stigma of an embarrassing nationalisation as well as protecting shareholders from having the value of their holdings completely wiped out. Following the bail-out, Resona's share price rose sharply.

When it bailed out Resona, the government cited a section of the DIC law that can only be used for banks with a positive net worth. Other sections, however, are for use with "bankrupt financial institutions or financial institutions where assets are unable to fully repay liabilities".

An official at a credit rating agency who asked not to be named said: "In Resona's case, if it did have negative net worth at end-March 2003, as is suggested by the subsequent independent audit, it should have been declared insolvent and dealt with either under [sections] 102(2) or under 102(3)." Section 102(2) allows for the failed institution to be merged with another company, while section 102(3) allows for the full nationalisation of the bank, which would result in shareholders' equity being written down to zero.

Controversy over the Resona bail-out intensified after it was announced this month that the bank would report a far higher than expected loss of Y1,760bn for the first half of the year - a figure almost equal to the Y1,960bn injected by the government.
Source: Financial Times
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Japan Still On the Deflation Trail

Japan economy minister Takenaka tells us Japan will triumph over deflation. Just one last question: how? No, this isn't fair, he does offer some pointers. But it still remains to be seen what these actually mean in practice......

Heizo Takenaka, Japan's economy minister, said on Thursday that the country could overcome its persistent deflation because the central bank is working more closely with the government. The key reforming minister of Junichiro Koizumi's government said in an interview with the Financial Times that the co-operation followed the appointment of a new governor of the Bank of Japan in March.

On the eve of US president George W. Bush's visit to Tokyo, Mr Takenaka said the BoJ would aim to raise money supply growth from its current 2 per cent to between 3 per cent and 4 per cent. For its part the government would increase demand through deregulation and clean up the banking system so that the BoJ's looser monetary policy was transmitted to the economy as a whole. Mr Takenaka said: "By combining these two, our calculations say that we will be able to overcome deflation."His suggestion that the BoJ was co-operating with government policy comes after years in which many saw the central bank as a stubborn opponent of price stability............

With the economy growing in the second quarter at an annualised 3.9 per cent according to official statistics, now was the time to press home the advantage. The economy minister said: "We hope to create a virtuous circle."

Mr Takenaka praised Toshihiko Fukui, who became bank governor in March, suggesting that he was more determined than his predecessor to halt deflation. "Since Governor Fukui took office BoJ policy is, in my opinion, moving in a good direction," he said.

The consumer price index for August fell just 0.3 per cent from the previous year although, measured by the gross domestic product deflator, prices are still dropping by about 2.5 per cent a year.

Mr Takenaka said that, "even with the CPI nearing zero", the BoJ had signalled its commitment to easy monetary policy for as long as necessary. The BoJ was "contemplating right now" how to signal its long-term commitment to price stability, with some BoJ members advocating a reference rate, a goal just short of an inflation target, he said.
Source: Financial Times
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Thursday, October 09, 2003

Japan: Conflicting Signals?


Along with the renewed pressure from the Bank of Japan against the rise of the yen, here is one more small piece of evidence that all may not be as well as the markets imagine:

Machinery orders placed by Japanese companies fell by a bigger-than-expected margin in August, according to official figures released on Wednesday, indicating an uncertain outlook for capital expenditure which has fuelled Japan�s nascent economic recovery. Orders for machinery made by private Japanese corporations, seen as an indicator of capital expenditure about six months ahead, fell 4.3 per cent in August from July, the Cabinet Office said. On a year-on-year basis, they rose 12.2 per cent, a smaller increase than expected. The weak data, together with the strong yen that on Wednesday traded at Y109.5 against the dollar, accelerated the decline in the Tokyo stock market, which fell for the first time in five days. The Nikkei 225 ended 2.6 per cent lower at 10,542.20.
Source: Financial Times
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Japan: Thrice Fooled?

Why do you blog. Sometimes for the simple comfort of knowing you are not alone. This time the case in point is Japan. I can't remember when I last saw anyone come out and say it straight as Richard Katz is doing here. His reasoning is fairly sound, the NPL problem is still there, structural reform has not gone as far as some claim, and the banking situation only seems sounder because all the speculation about recovery has seen the value of equities rise, and this of course has boosted the value of bank reserves. But I am convinced for another reason which Katz doesn't mention (in fact in the course of two books he manages to mention that Japan has a demographic problem about twice). This is why I'm convinced even his ten year horizon could be way too optimistic. Without a change in mentality towards immigration Japan is unlikely to go anywhere particularly attractive, and this change is the one I definitey don't see coming.

Fool me once, shame on you. Fool me twice, shame on me. How about three times? Japan is now experiencing its third cyclical upturn in the last decade. Once again, we hear that "Japan is back". Once again, investors are betting tens of billions of dollars that this recovery will last. Doubtless a skilled market player can get rich in a stock market that doubles and halves every few years. But unfortunately, this time is not different. One reason we know this is that the arguments being handed out today are the same premature declarations of victory handed out in the previous false dawns: that the non-performing loan (NPL) problem is being solved and that companies are rapidly restructuring. One new rationale is that Junichiro Koizumi, the current prime minister, is a reformer.

But Mr Koizumi was at the helm when, not so long ago, alarmists insisted that Japan was about to crash. Indeed, some of today's born-again bulls are yesterday's doom-sayers. There is also a more fundamental reason for scepticism: Japan cannot recover without structural reform. Japan's long-term potential growth is still about 1.25 per cent. This rate cannot be raised without a productivity revolution born of structural reform. Meanwhile, structural defects that depress household income continue, causing a chronic shortfall in private demand. Certainly, some reforms have been made but not enough to restore vibrancy in the near term.

Bulls point out that NPLs declined in the 2002 fiscal year for the first time in six years. Nonetheless, NPLs still remain higher than in any year except one. More importantly, Japan has done little to weed out the non-performing borrowers behind the debt crisis. Bankruptcies are not rising, but falling. Japan continues to keep zombie companies going via government loan guarantees, sub-market interest rates and debt waivers. Among publicly listed companies, 16 per cent of the debt is held by companies that do not earn enough to pay even today's ultra-low interest rates. Another 14 per cent is held by companies that earn just a tiny bit more. To keep these companies afloat, 10 per cent of all loans charge less than 0.5 per cent, up from 5 per cent a few years back.

As for corporate restructuring, there is less than meets the eye. Most of the improvement in financial indicators is due to cost-cutting measures such as wage cuts - which hurt consumer demand - not genuine increases in efficiency. The average return on assets halved in the 1990s to just 3 per cent. The data to June 2003 show no trend recovery in returns, just another cyclical bounce.Company inefficiency is, in turn, the product of weak competitive pressures. Here some trends are moving backwards. Business start-ups and closures are both down. In most industries, the market share of the top three companies is increasing, partly because of the merger and acquisition activity that some mistakenly hail as reform.

Worse yet, most of the good news is limited to Japan's biggest companies. In the 2002 fiscal year, which ended in March, the 1,200 biggest publicly listed companies enjoyed a 38 per cent increase in operating profits. But they produce less than 10 per cent of Japan's economic output. By contrast, the small and medium-sized companies that produce most of Japan's output suffered a 12 per cent drop in both sales and operating profits. Mr Koizumi does seek reform. However, his priority is not the economy. It is destroying the corrupt nexus linking party bosses in the ruling Liberal Democratic party (LDP), state enterprises in construction and elsewhere, and their bureaucratic protectors. He has split anti-reform factions of the LDP and is now ousting Haruho Fujii, the Highway Corporation president, for allegedly cooking the books.

Time will tell whether Mr Koizumi can go on to privatise some of the main state enterprises, such as the Highways Corporation and postal savings. Some of the new allies he made to secure his re-election as party leader oppose these reforms. Even if he succeeds, privatisation alone will have a marginal impact on growth so long as the resulting entities remain virtual monopolies, as when Nippon Telegraph and Telephone (NTT) was privatised in the 1980s. Markets must be open to new competitors. Reform will eventually return Japan to sustained growth of 3 per cent or so. But that will probably take another decade. As for this year, it takes more than a few swallows to make a spring.
Source: Richard Katz, Financial Times
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Saturday, October 04, 2003

The Future of Japanese Savings


Well here's Eddie right on call with this week's Straits Times column, giving details on those Japan unemployment numbers, and some interesting and preoccupying background on Japanese saving:

More and more Japanese are dipping into their savings to make ends meet, according to a survey by the Bank of Japan. A record 51 per cent of Japan's households said their savings had dropped during 2003, while the number of families with no savings at all has risen to a 40-year high of 22 per cent, the survey revealed. The results are the latest indication that a decade of economic stagnation and policy mismanagement has not come without cost and will serve to remind new cabinet ministers appointed on Monday of the urgency of their task.The disclosure also raises questions about policymakers' claims that Japan's Y1,400bn ($12.5bn, 10.9bn, �7.6bn) in personal savings will cushion the effects of a downturn.The poll covered 6,000 households, 60 per cent of which said declining incomes were the main reason they were having to use their savings, an increase of 8.4 per cent compared with last year.Figures released yesterday by the National Tax Agency showed average annual remuneration declined 1.4 per cent in 2002 compared with the previous year, the fifth consecutive year of decline. The agency said the number of wage earners decreased by 490,000 to 52.56m in 2002, the first decline in two years. Unemployment in Japan was 5.3 per cent in July this year, down from a record high of 5.6 per cent earlier this year. However, the period of unemployment is increasing, with one in three now jobless for more than a year, according to the latest figures from the Labour Ministry. Unemployment for those under 24 is about 10 per cent.The BoJ survey also unveiled deep disquiet about retirement, with 80 per cent saying they were "worried", rising to nearly 90 per cent of those under the age of 60. They cited a lack of savings and insufficient pensions benefits as the main reasons. Figures released this week by the National Pension Fund Association revealed it achieved a negative yield of 14.5 per cent on assets under management in fiscal 2002, the worst result since its launch in fiscal 1991 and its third consecutive year of negative returns. According to a recent report from Greenwich Associates, assets at employee pension funds in Japan cover only 62 per cent of future payments compared with 103 per cent in the US.Reversing declining incomes, tackling unemployment and ending the erosion of savings will depend on economic recovery - and there are signs of revival.The latest figures showed growth at an annualised rate of 3.9 per cent, although the gross domestic product deflator is running at minus 2.5 per cent and has been in negative territory since 1995.
Source: Eddie Lee, Straits Times

The Japanese 'Recovery' in Question

Blogging has been intermittent, not to say non-existent these last few days as I have been away on fieldwork. The world, however, has not stood still in my absence, and I have the feeling that some of the US data yesterday could turn out to be quitre significant. Certainly it seems that some of the underlying questions about where the principal OECD economies are headed might now start to be clarified. In this context, the latest info from Japan could be read as the beginings of a return to reality. The unemployment numbers need to be read carefully, since the number of people of working age in Japan is now falling, and the drop is to be expected. Morre interesting are the output figures. My feeling is that Japan had revved-up on the hope (and expectation) of a major global recovery, if the wobbly state of the US economy that was revealed yesterday continues to follow this line this will by no means be guaranteed, so expectations in Japan may need to be revsied downwards. Any such revision would simply open up for all to see those 'old problems' which have certainly not been resolved. One last detail: note the comment about the value of the yen not being so high as it seems because of the price effect of years of deflation. Japanese prices, denominated in yen, are a little more competitive each year. However, whatever the fine detail of the situation, a yen at 110 to the dollar is hardly going to help Japan fight the deflation problem.

Unemployment fell to a two-year low of 5.1 per cent in August but industrial output shrank 0.5 per cent in the same month, sending mixed signals about the strength of Japan's recovery. The number of unemployed fell by 280,000 to 3.33m, down 0.2 percentage points from the previous month on a seasonally adjusted basis. This was the first time the monthly jobless number declined by more than 200,000 since 1990. There was also good news in a survey of sentiment among small and medium businesses which showed a surge in confidence close to peaks of the mid-1990s. This improvement in sentiment among Japan's more vulnerable companies comes ahead of today's Tankan business confidence survey, which is seen as one of the economy's most important leading indicators. Revised figures showed growth in the second-quarter at an annualised 3.9 per cent, adjusting for deflation. However, even after revising its growth estimate upwards recently, the government is predicting nominal growth for this year of just 0.1 per cent.

Signs of business confidence and evidence that the economy is at last creating jobs after six quarters of growth were countered by the fall in output. The 0.5 per cent drop came in spite of an increase in shipments, suggesting that manufacturers are still cautious about future growth prospects. Masaaki Kanno, economist at JP Morgan in Tokyo, said: "Manufacturers still do not have the confidence to accumulate inventory." He said the same trend was visible in the US, suggesting that manufacturers might be moving towards a leaner inventory model. Mikihiro Matsuoka, economist at Deutsche Bank, said: "This is not a strong recovery but the upward slope is real." Fears that yen appreciation might choke off recovery were overdone, said Mr Kanno. Because of continued deflation, even if the yen strengthened to Y105 to the dollar, this was equivalent to Y115 in 1999, a competitive rate. He said there was no correlation between corporate profitability and such relatively minor movements in the currency.
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The Economist and Japan's 'Dysflation'


I've been pretty quiet on Japan recently. This is because I think we need to wait and see what kind of reality there is behind the optimistic projections - and share prices - that we have been seeing recently. I don't think the problem, has gone away by any means. At best we are on the upswing of what remains of the business cycle in Japan. The economist is not too convinced either, and has coined the expression 'dysflation' for the Japanese condition. What I still think is unfortunate is that virtually no-one is prepared to even countenance the idea that Japan's demographic problems (and it's resistance to immigration) could have any part in the explanation. The idea isn't even examined in order to discard it. It seems to be a blind spot pure and simple.

So what exactly ails Japan? Clearly not just the usual sort of business downturn, which can be cured, though painfully, with lay-offs and closures and sometimes with a government shot in the arm. Nor can its chronic weakness be attributed solely to a burst bubble and falling asset prices, though that is clearly part of the problem. Many other countries have been similarly stricken, and have managed to recover. In Japan, the misery has lasted for almost 14 years.

The Economist would like to suggest its own label for Japan's illness. It is �dysflation�: a form of deflation in which dysfunctional economic-policy institutions counteract what would otherwise be good medicine for falling prices. The policies, especially with regard to banks, combine in ways that do more harm than good. More important, policymakers themselves are more inclined to avoid problems than address them; would rather win bureaucratic feuds than co-operate; and base most of their decisions on emotion (such as fear of shame) rather than reason.

It helps to keep all these aspects of dysflation in mind when assessing Japan's problems. Consider, for example, the Bank of Japan. Ordinarily, the best response to deflation�that is, falling prices throughout the economy, and not merely for a few products such as Chinese manufactures�would be lower interest rates and feverish printing of money. Japan has had zero interest rates since 1999, however, and has been boosting the money supply at a rapid clip since early 2001�and prices have continued to fall. According to the most respectable measure, the GDP deflator, they have fallen 7.6% since 1997, and are still dropping fast. Eventually, all the money that the Bank has been printing will be sucked through the financial system and expelled into the economy in the form of higher prices and rising nominal interest rates. But it is taking a perplexingly long time to happen.

The Bank's explanation is that Japan's deflation is a very rare strain indeed. It points to the large quantity of non-performing loans that have piled up in the banking system. Never in the history of human endeavour have so many owed so much for so long. And as the Bank's officials like to point out, new bad loans, at least until recently, continued to accumulate faster than the banks were writing off old ones, and the Financial Services Agency (FSA), which regulates banks, has done nothing to stop this. Banks are lending mainly to their worst borrowers; and with the credit channel not operating properly, the usual monetary-transmission mechanism cannot work either.

There is probably some truth in this argument. What it ignores, however, is the overarching role that expectations�of firms, workers, consumers and investors�play in transmitting the central bank's policies into rising or falling prices, and the need for the central bank to manage those forecasts. The Bank has not only failed utterly in this role, but has refused to take responsibility for trying.

Under the previous governor, Masaru Hayami, whose term began in 1998, every constructive policy that the Bank undertook was undermined by a statement that the Bank did not really expect its policy to get prices rising again, at least not quickly. This had a sort of reverse placebo effect. Even as the central bank was administering potent medicine, Mr Hayami said that it was only doling out sugar cubes. A new governor, Toshihiko Fukui, took over in March, and has been an improvement. Conceivably he will do a better job than Mr Hayami of convincing people that all that loose money will not be vacuumed up again at some point by the Bank. But even Mr Fukui has shown traces of his predecessor's dysfunctional approach.
Source: The Economist
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