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Monday, November 28, 2005

Foreign Investors Buy Into the Japanese Recovery

Foreign investors buy into the Japanese recovery, but the Japanese themselves apparently don't, or at least if they do its's on nothing like the same scale. More to add to the puzzle I was getting at in my last post about how people seem to find all this so hard to understand or accept. Denial, what denial!

Foreign buying of Japanese stocks has reached a record level as global investors buy into the country’s economic recovery. Overseas investors bought Y9,441bn ($78.9bn) more in Japanese shares than they sold in the year to November 18, according to the Tokyo Stock Exchange. The figure includes trading on the Osaka and Nagoya exchanges and beats the previous record of Y9,127bn in 1999.

Feverish overseas interest has been the biggest reason behind Japanese stocks’ sharp rise. The Tokyo Stock Price index climbed 33 per cent to 1,529.67 by last Friday – though the rise is still dwarfed by the near 60 per cent increase in 1999.....

But the strong interest shown by foreigners contrasts with the scepticism of Japanese institutional investors, who are still net sellers. For this reason, Japan bears regard this year’s share price rally as very fragile.

Here We Go Again!

Well yet another consumption driven recovery seems to be grinding to a halt in Japan. The only thing which puzzles me is why people continue to be surprised, and why people fail to see the similarieties between Japan and Germany in this regard. It's an up-hill (rather than a flat) world obviously:

Japan’s “Warm Biz” campaign, which should have boosted the sale of warm winter clothes, has failed to catch the imagination of consumers. Retail sales in October were down 0.3 per cent on the year – the first annual fall in eight months. The news prompted the Ministry of Economy, Trade and Industry, which published the figures on Monday, to downgrade its view on retail spending. An official was quoted by Reuters as saying on Monday that retail sales were flattening, toning down the Ministry’s view in the second quarter that sales were recovering moderately.

There is some discussion of the German comparison in this post and comments.

Meantime, with the fiscal deficit issues looming in both countries, central bank independence (or reducing it I should say)is one more creeping onto the agenda. I noted this last week vis-a-vis Japan:

Heizo Takenaka, the powerful internal affairs minister, told the central bank it should set monetary policy in conjunction with the government. In a repeat of stern remarks made by another senior politician this month, he warned the BoJ that its independence could be stripped away if it tightened policy prematurely.


Meantime, vis-a-vis Germany, Wolfgang Munchau reminds us that:

"It is still not too late to propose ECB reform as part of the next treaty revision. For as long as EU leaders maintain the status quo, they have the central bank they deserve."

"The pre-announced interest rate rise that the European Central Bank is due to agree this Thursday must rank as one of the most bizarre monetary policy decisions of recent times. The economic recovery in the eurozone remains fragile, as last week’s German confidence indicators have shown. Even the ECB’s own forecast for headline inflation is relatively optimistic, while core inflation remained unchanged at 1.5 per cent in October."


I couldn't agree more with Munchau about one thing though: the recent decision announced by Trichet to raise eurozone rates "must rank as one of the most bizarre monetary policy decisions of recent times"!

Sunday, November 20, 2005

Good News, Now Let Battle Commence!

Most commentators are getting excited about the recent reading on the Japanese core consumer prices index which stopped falling in October. There is just one small snag, the core CPI in Japan - until next August - still includes oil and energy costs. Stripped of these it is estimated that the underlying CPI was still down by about 0.3 per cent. The reading does however mark the first 'near miss' of the Japanese index with positive prices in some years, so it is hardly a 'non-event'. Meantime, as the FT notes:

Instead of celebrating, politicians lined up to remind the Bank of Japan that it was too early to declare deflation dead or to ditch its super-loose monetary policy.

Heizo Takenaka, the powerful internal affairs minister, told the central bank it should set monetary policy in conjunction with the government. In a repeat of stern remarks made by another senior politician this month, he warned the BoJ that its independence could be stripped away if it tightened policy prematurely.

The government of Junichiro Koizumi, prime minister, is worried that the BoJ could choke off the lengthy, but fragile, recovery by exiting too early from the ultra-loose quantitative easing monetary policy adopted in 2001.


Curiously enough all of this has a striking parrallel with what is happening in Germany right now, where politicians, who want to address the fiscal deficit by raising taxes are worried that the ECB could choke off the fragile German recovery by exiting too early from the ultra-loose monetary policy operating for some months now in the eurozone.

Monday, November 14, 2005

An Orderly Withdrawal?

On one version of events the Bank of Japan is simply dotting the 'i's and crossing the 't's on it road map to exit the massive monetary easing process sometime during the next six months. On another the road itself is fraught with difficulty, and an overly 'inflation wary' central bank might risk upsetting the whole apple cart if it proceeds to rapidly. It is this tension which seems to be reflected in today's FT article from David Pilling about a shouting match which seems to have broken out between the Ministry of Finance and the BoJ. According to Pilling:

Japan’s government on Monday tried to calm a potentially explosive row with the central bank over the timing of monetary tightening, saying there was no “wavering of trust” in its relationship with the Bank of Japan.

The MoF is concerned that any premature monetary tightening could threaten fragile economic growth and limit its ability to conduct what it considers essential fiscal tightening.

MoF officials are also concerned that the central bank may cut its purchases of government bonds, currently at Y1,200bn a month, as part of monetary tightening, a move that could push up long-term rates and damage efforts to roll over huge quantities of public debt.

Hidenao Nakagawa, policy chief of the ruling Liberal Democratic party, is quoted as saying:

The BoJ has no independence when it comes to policy targets.If it does not understand this, we need to consider amending the BoJ Law

Former BoJ board member Nobuyuki Nakahara is also cited as saying that the central bank was “crazy” if it thought the government would let it reduce JGB purchases, since it was a move which “would immediately invite long-term rates to rise.”

Coincidentally or otherwise the FT also has a story today about how Sadakazu Tanigaki, Japan's finance minister, said on television on Sunday that spending cuts and a reduction in debt issuance were not sufficient to restore government finances to sound health, and that an increase in consumption tax was required to tackle the country’s heavy debt burden.

And if anyone is really interested in following where the coincidences end here and the patterns begin, the FT has another piece, about Germany this time, where it notes that the new coalition partners "are poised to preside over one of the most fiscally conservative governments in nearly two decades". Value-added tax is about to rise by three percentage points from 2007, with two-thirds of the proceeds going towards plugging the budget hole. The top tax rate for high earners will rise by three percentage points, and many tax incentives that had allowed Germans to minimise their tax bills will be scrapped. A corporate tax reform intended for 2007 will also be postponed by one year.

Of course both Japan and Germany are countries with export driven economies, running balance of payments surpluses, and where domestic consumption has been running notoriously weakly, so the ecopnomic rational here is peculiar, except for the fact that both have the fical holes due to the presence of rapidly ageing popultaions.

Still, if you want to follow the coincidence through to the end, what's the betting that government representatives in Germany (but this time perhaps diplomatically), are making it known over at the ECB that moving later rather than sooner with any rate rises would be greatly appreciated.

Friday, November 11, 2005

Japan Continues To Grow

I think there is a pretty fair and balanced assessment of the current Japan situation by David Turner in today's FT. He makes the following points:

1/. Japan’s economy continued to grow slowly but surely in the third quarter, supported by heavy investment by companies and moderate growth in consumer spending.

2/. The world’s second largest economy was expanding despite a negative contribution from trade. The country’s trade surplus in the period had narrowed on high crude oil prices, reducing overall GDP by 0.1 per cent.

3/. Corporate investment remained one of the high points of the economy, as companies took advantage of continuing high profits. Capital spending rose 0.7 per cent.

4/. The real-term rise in third-quarter GDP was also the slowest this year, compared with the 0.8 per cent growth in the June quarter. Recent data on household spending, such as retail sales, have disappointed economists. Although Japanese consumers are spending more, the country is still far from a consumption boom.

5/. There have been encouraging signs which point to the end of deflation. Property prices are at last rising in Tokyo....At the same time, residential property prices continue to fall throughout most of Japan. Moreover, the Cabinet Office said on Friday that the GDP deflator – which some economists favour as a broad measure of inflation – was 1.1 per cent down on the year.

Wednesday, November 09, 2005

Don't Speak To Soon

Don't Speak To Soon

I have been arguing continuously for some months now that Japan might not escape the deflation trap so easily as some seem to imagine. Today there are two pieces of news which should at least give the 'optimists' some pause for thought.

Firstly the news that Japan's economy most likely slowed in the third quarter, with one of the principal explanations being the lack of dynamism in the consumer sector.

Secondly Morgan Stanley's Takehiro Sato suggests that negative influences on prices may mean that y-o-y positive prices may still be quite a time away.

Based on the above, it is clear that the scenario calling for the BoJ to eliminate quantitative easing owing to a slight recovery in the core CPI inflation rate is now on unexpectedly shaky ground. Even if the BoJ is compelled to keep its commitment and eliminate quantitative easing, the factors affecting whether it will be able to follow that move fairly soon with rate hikes as currently planned are becoming even less certain over the near term.