Doubts Continue About Japanese Consumption

The Japanese Cabinet Office have just released another report on the state of the Japanese economy. Unsurprisingly they one more time draw attention to the lacklustre state of Japanese domestic consumption:

the report, which looks at a variety of economic factors besides gross domestic product, warned of weakness in consumer spending, saying sluggish growth in wages was keeping spending flat.

Domestic demand, which accounts for more than half the economy, undercut growth in the July-September quarter, forcing the government to downgrade its economic outlook earlier this month.

The latest report echoes concerns that although Japan has emerged from a decade-long economic stagnation — with robust exports contributing to record profits at Japanese companies — those profits have not driven up wages and spending.

The Japanese economy's recent growth is also less stellar than the double-digit growth it experienced from the late 1960s. The economy grew at an annualized pace of 0.8 percent in the third quarter.

Prime Minister Shinzo Abe later told reporters that he would work to realize economic growth that "can be felt by the general public."

The BoJ governor Toshihiko Fukui was unusually downbeat:

"We can keep an accommodative monetary environment led by very low interest rates for some time," Fukui told business leaders at a year-end meeting of the Japan Business Federation, also known as the Nippon Keidanren.

"We will tighten monetary policy if economic activity and prices develop in line with our projections," he said.

My feeling is that they are worried, not rattled, but worried, and they have reason to be. If cLuas and I are right here, and domestic demand isn't going to recover as anticipated, there are important policy changes to be made, and if they are to be effective these need to be made sooner rather than later.

Surplus Widens in Japan

(Cross post from Alpha.Sources)

The November data on Japan's trade is out and Bloomberg reports how the surplus has widened on the back of accelerating exports and a low yen.

Japan's export growth unexpectedly accelerated in November, easing concern that the expansion of the world's second-largest economy is cooling. Imports slowed, reflecting a decline in oil prices.

Exports rose 12.1 percent, helping the trade surplus widen to 915.9 billion yen ($7.7 billion) from 594.4 billion yen a year earlier, the Ministry of Finance said today in Tokyo. Imports gained 7.5 percent, down from 17.5 percent in October.

The yen's decline against the dollar and euro has helped reduce the effects of slower overseas demand, bolstering exports. Shipments abroad grew at the slowest pace in six months in October, causing concern that the economy would stall amid sluggish consumer spending at home.

``There is no doubt that the yen's weakness remains an engine for Japan's exports,'' said Yoshimasa Maruyama, an economist at BNP Paribas. ``Today's numbers confirm Japan's exports maintain more momentum than we had expected.''

(...)

Japan's economy expanded an annual 0.8 percent in the third quarter and would have shrunk if it weren't for strong export growth and corporate spending on factories and equipment. Consumer spending, which accounts for more than half of the economy, had the biggest decline in almost a decade.

Japan is indeed growing but ever more so on exports which, I might add, is totally in line with expectations since Japan's old and ageing population can't support growth through domestic consumption. In short; the idea of a balanced growth path is really difficult to sustain here. An interesting point here is also how the low Yen has helped to boost exports. This is of course not very complicated to understand but it should be quite clear that if exports continue to be the main driver of growth (I believe this will be the case) then the BOJ simply won't be able to raise rates. This is mirrored in the situtation on consumer spending which seems to be persistently downtrending despite an after all pretty loose monetary stance of 0.25%. This means that if Japan is going to sustain economic growth the BOJ will have to keep those rates down. Clearly, this has implications for international capital flows and as I have argued recently demographics form a considerable part of the picture. Edward Hugh's recent post on emerging markets is also very much to the point I think. In my opinion we need to look at Japan as testcase for how a country with a relatively very old (in fact, the oldest) population is positioned in the international economy and once we understand why this is we need to go to Italy and Germany and try to apply some of the same reasoning. It is, as I have said before, at this point that we can see how demograpics represent a very strong anchor to conceptualize the dynamics of the macroeconomic environment.

Japan: Fiscal Tightening Ahead

Koji Omi, Japan's finance minister, claimed yesterday that the gross domestic product deflator - an important measure of deflation - would turn positive in the year to March 2008 for the first time in a decade:

“The GDP deflator for the current fiscal year was minus 0.4 per cent, and that will become plus 0.2 per cent in fiscal 2007/08,” he said. “That shows the economy will become normal.”

Not everyone is completely convinced however:

Robert Feldman, economist at Morgan Stanley, said the disappearance of deflation as measured by the GDP deflator would be an important moment if it came true. However, he said that five years of economic growth were feeding through more slowly than expected into inflationary pressure.

This is just the point. As I have been arguing, consumer demand is proving to be much weaker than might have been expected, and this is raising doubts whether Japan can, finally, escape deflation.

Inflation has yet top break the 1% mark, and the yen is running still at historic lows against the euro, and is fairly weak against the dollar, both circumstances which are likely to be inflation positive.

At the same time Prime Minister Shinzo Abe seems determined to try to move forward to address the government debt situation, so that may well help explain the reluctance, commented on yesterday, of the BoJ to raise interest rates.

In fact the cuts they are looking at are no mere trifle:

Japan's government may eliminate its budget deficit earlier than the target date of 2011, Finance Minister Koji Omi said, confirming Prime Minister Shinzo Abe's commitment to cutting the world's largest public debt.

``If we just persist a little longer we may even be able to come in ahead of schedule,'' Omi said today in Tokyo after his ministry proposed reducing new bond sales by a record and curbing spending on public works in the year starting April 1.

The so-called primary deficit, the gap between revenue without new bond sales and annual spending excluding interest payment on debt, will decline to 4.4 trillion yen in fiscal 2007 from 11.2 trillion yen this year, improving for a fourth year. The government in July said it wants to eliminate the primary deficit by 2011 to stop the public debt from expanding.

So they would be aiming to make 7 trillion yen of savings in one fiscal year. Since this saving is only to come from a reduction in borrowing, and since interest rates are still only at 0.25% (and thus could not be claimed to have been excessively driven up by government borrowing), it is hard to see where the uptick in demand is going to come from to compensate for the cuts.

So it is hard to see the BoJ being especially vigorous with trying to raise rates, and it is hard to see where the inflationary pressure they are going to need to get themselves out of the mire of deflation is actually going to come from.

No Change At The Bank of Japan

Unsurprisingly, the Bank of Japan kept interest rates unchanged yesterday.The decision was unanimous. . Obviously that now opens the question as to whether they will in fact ever (in the short run I mean) be able to get round to raising. It depends on the external environment, and how much exporting they will be able to do in Q1 2007, I guess. But still they won't be going very far.

Bonds rose and the yen fell after Fukui said the bank wants to check more statistics on consumer spending and prices, which he described as ``somewhat weak.'' The bank isn't under pressure to raise rates because the economy, while in its longest expansion since World War II, grew at the slowest pace in almost two years last quarter.

``Fukui admitted that the some sectors of the economy, such as spending, are weak,'' said Hitomi Kimura, a bond strategist in Tokyo at JPMorgan Securities Japan Co. ``Such comments reduced expectations for higher rates.''

The yield on the benchmark 10-year bond fell 5 basis points to 1.63 percent at 5:54 p.m. in Tokyo. The yen declined to 118.12 per dollar from 117.92 before the announcement the key lending rate would be unchanged.


Tankan Report

The yen had its biggest drop in four months last week as reports, including the Tankan survey of business confidence, failed to provide enough evidence that the economy is accelerating.

The Tankan survey released last week showed confidence among large manufacturers rose to a two-year high and companies increased their forecasts for spending, profit and sales. They also said production capacity was the tightest since 1991 amid the most severe labor shortages in 14 years.

That survey wasn't enough to allay concern that the economy is slowing that followed the third-quarter gross domestic product report. The economy grew at an annual 0.8 percent pace in the period, less than half the government's initial estimate, as consumer spending slumped.


Meantime Cluas Vistesen has another timely post digging a bit deeper into the Japan phenomenon.

Adjusting the Views on Japan?

(Cross-post from Alpha.Sources)

In my comments on Japan here at AS I have consistently advocated a rather pessimist discourse on the economy primarily driven by my belief that the economy is in a structural bind with a continuing downward trend in consumer spending regardless of the how well the corporate sector (i.e. the export sector) fairs. In short, I do not see Japan returning to a balanced growth path anytime soon (neo-classical growth proponents, take note!) and my analysis fundamentally hinges on the strong life-cycle component of the domestic consumption trend or put in another words; demography matters here!

Apart from my personal stubborn and persistently pessimistic position on Japan I also in all fairness have to point the data which has done nothing but support mine (and other's) narrative on Japan. Specifically, I am talking in a large (about 1 year) perspective. Consequently, it is sometimes nice to step back and look what has actually happened since Japan chose to end ZIRP back in the late spring this year. Back then, the move by the BOJ was widely seen as one of many steps in a long consistent process to mop up excess liquidity and normalize Japan interest rates, Japan was back amongst the leaders! Clearly, this has not been the case and one of the most striking features about Japan in the moment is how the BOJ just cant seem to find the economic justification to begin to turn off the money tap. Meanwhile, some of the most brilliant economic commentators still argue that it is only a matter of time before we see the much allured spill-over effect from the sparkly corporate sector to domestic consumption, that is the transition to a balanced growth path. We only need to wait. All this is of course being printed along side an inflation rate which is still flirting dangerously with the 0% mark and thus negative range and this has many thinking overtime because why is inflation so low in the light of a tightening labour market for example? Some indeed has come along way in seeing this correctly, and now also the big guns (i.e Morgan Stanley again) is also at least opening a backdoor as a hedge against the traditional positive stance ...

What we outline here is a risk scenario, not our main one. Nevertheless, we do not think it is a low-probability scenario, considering that the latest reading on price growth is very low, at just 0.1% YoY. In light of oil price trends, the Japan-style core CPI could contract again YoY in 2007 H1, contrary to our constructive economic outlook.

(...)

The recent, substantial, retroactive GDP revisions [see also here] confirm the weakness in the core of core CPI. For the F2006 national accounts, real GDP was revised downward by 0.9 ppt to 2.4%, which should have more than a negligible impact on estimates of the output gap since the economy’s potential growth rate is just shy of 2% at best. Based on the revised GDP data, the pace of the contraction in the output gap in F2006 declines by almost 1 ppt. If the improvement in the output gap is only modest, the spillover effect on prices would naturally be that much weaker.

Also please take note of this ... the return to ZIRP is not a fairytale but a distinct possibility.

If the Japan-style core turns negative several months after the next rate hike, it would be easy to imagine the BoJ being in a politically difficult situation in terms of putting a crimp in the Cabinet/ruling coalition’s pro-growth policies. Governor Fukui would not likely have to resign, but the choice of his successor after his term ends in March 2008 could be affected to some extent. To be more specific, Deputy Governor Toshiro Muto, who is currently widely expected to be the next governor, may be less likely to be promoted and the government and the ruling coalition may instead look for a candidate outside the BoJ

(...)

If someone with a strong monetarist bent is named to be the next governor, Japan could be stuck in an ultra-low rate environment for a long time, with price growth hovering very low. If policy is focused on an increase in money supply, the BoJ may increase the supply of reserve deposits and put the policy rate back to near 0%.

I think the key words for reading the Japanese economy at the moment is a bit of open mindedness in terms of what we could call the traditional/text book macroeconomic convictions. It should be quite clear for regular readers that I believe demography is a key determinant here. However, this does not mean that demography is the holy grail which can be applied universally to all macroeconomic issues. But in the case of Japan, the demographic economic analysis which is clearly an analytical field in development represents a very strong theoretical anchor for understanding what is going on; at least I believe this should be clear by now.

Japanese Growth Revisited

This article on the recent downward revision of Japanese growth is a bit old now, but it does contain a few useful points:

Japan's economy grew at a far weaker pace in the third quarter than previously reported due to downward revisions in consumer spending and capital investment, the government said Friday, raising concerns about the recovery's strength. Gross domestic product expanded at an annual rate of 0.8 percent, well below the preliminary 2.0 percent announced in November, but marked the seventh straight quarter of expansion, the government said.


Since exports remained relatively strong, the big changes were a revision downwards of consumption and investment:

Domestic demand — which includes consumer spending, government spending and private investment — had contracted 0.2 percent from the previous quarter instead of inching up 0.1 percent, as previously thought.

Separately government data viewed as a key indicator for corporate investment, released Friday, showed core machinery orders rose a weaker-than-expected 2.8 percent in October from the previous month. That reversed September's 7.4 percent plunge but missed the forecasts by economists surveyed by Dow Jones Newswires for 5.7 percent growth.

The key to the picture would seem to be consumption, since the weak investment most likely is a by-product of an equally weak estimate of the likely direction of internal consumption:



Economy Minister Hiroko Ota blamed the downward
GDP revision mostly on weak consumer spending, but assured the public that Japan's economic revival was on track.

"The lower GDP was mainly caused by weak consumption," she said. "I don't have any concerns that the economy will fall into a downward trend. Nor do I see any signs of its entering a lull."

Although Japan's economy has been emerging from decade-long slowdown that ran through much of the 1990s, recent signs have underlined the risk that growth may be overly reliant on exports. Some analysts say the revival is dependent on U.S. and other overseas economies holding up.

Analysts also say paychecks and other realities that trickle down to workers don't reflect upbeat GDP numbers, as companies cut costs to keep up with global competition and the Japanese population ages and increasingly shifts to lower-paying jobs.

This weak consumption in Japan meme now seems to be catching on, as this article on the world economic outlook from AP this weekend seems to have already internalised the idea that Japanese consumption is the current big enigma:

Japan, Asia's largest economy, is steadily recovering from a decade of stagnation. However, consumer spending appears to be weakening, leaving the economy vulnerable to slowing demand for exports, its traditional source of growth.

Anyone interested in a fuller theoretical explanation as to why consumption is holding so weak could do worse than this post of mine, or this post from Claus Vistesen.

December Tankan Index

Well the latest edition of the Bank of Japan’s Tankan survey is now public property, and it does register a marginal increase to 25 from 24 last time. Perhaps just as significantly though the companies surveyed expect the index to decline to 22 next time round, which means that the forward looking component is not overly strong.

Perhaps the most noteworthy point in the FT article was this one:


"One of the mysteries of the present recovery, now in its fifth year, is the slow pace at which record corporate profits and a tight labour market have transferred to wages and consumption. Mr Ogawa said companies would have to start increasing the share of profits given to labour over the next year or so, but he didn’t expect any dramatic rise in wages."

Well I hope that by now this feature of the Japanese situation should no longer be a mystery for regular readers of Bonobo Land or Demography Matters, or for that matter for readers of Claus Vistesen's blog. Basically a rising median age is affecting the savings component relative to consumption, while at the same time the tightening labour market is more a reflection of a reducing potential labour force than anything else. Thus:

The diffusion index for employment conditions at big companies in all industries registered minus 11, compared with minus 8 in September. A negative number reflects a labour shortage, a situation that is expected to deteriorate over the next three months when the index is projected to reach minus 13.

Given Japan's demographic not only should we expect this situation to deteriorate, it is hard to see how it can do other than deteriorate, and deteriorate.

Incidentally we have another version of the every cloud has a silver lining story running in Japan at the present time:

"Capital Economics, a London-based research company, said a rate rise next week would be “more Santa than Scrooge” since it could actually improve consumer sentiment by boosting the interest paid on savings. Economists regard domestic an improvement in consumption as vital to keep the recovery going and to consolidate the defeat of deflation."

Well the last time I thought about it, rising interest rates were thought to encourage saving, not discourage it. So although there may be some sort of wealth effect somewhere, the NET impact is sure to be negative for spending, not to mention what rising interest rates would do to the servicing problem for Japan's enormous mountain of public debt.

In(de)flation in Japan?

(Cross post from Alpha.Sources)

I actually have a link to this in the post below but I still believe it deserves attention above the fold. On the back of this I would really like to hear anybody arguing the BOJ to raise any time soon.

(From Bloomberg)

Japanese inflation unexpectedly slowed in October as oil prices dropped, dashing expectations that the central bank will raise the lowest interest rates among major economies later this month.

Core consumer prices, which exclude fresh food, rose 0.1 percent from a year earlier, the statistics bureau said today in Tokyo, slower than the 0.2 percent median forecast of 36 economists surveyed by Bloomberg News. The unemployment rate dropped to 4.1 percent, close to an eight-year low of 4 percent, a separate government report showed.

Governor Toshihiko Fukui has said the Bank of Japan needs to gradually raise the lowest interest rates among major economies to sustain economic growth and avoid excessive business investment and asset-price bubbles. A slowdown in core prices won't impede the bank's attempt to raise interest rates early next year, said economist Eishi Yokoyama.

``It's clear that energy prices are really weighing on consumer prices and are one reason inflation isn't picking up,'' said Yokoyama, an economist at AIG Global Investment Corp. in Tokyo and one of seven surveyed who correctly predicted the number. ``Recently BOJ policy makers have been very upbeat so this number alone won't deter them from raising rates in January.''

The yield on the 10-year government bond fell 4 basis points to 1.605 percent as of the lunch break in Tokyo, the lowest in more than two months.

Household Spending

Household spending slipped 2.4 percent, less than a 4 percent median estimate of economists, the statistics bureau said in a separate report. The yen traded at 115.57 per dollar at 11:10 a.m. in Tokyo from 115.70 before the reports.

Consumer price gains slowed because of declining oil prices and the inflation trend is unchanged, Economic and Fiscal Policy Minister Hiroko Ota said in Tokyo today. The timing for an interest-rate increase is up to the Bank of Japan, she added.