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Thursday, February 23, 2006

On The Japanese Trade Deficit

I'm trying to think about the implications of the economic fundamentals driving Japan's 'sustainable recovery'. What we know is that as the population ages the labour market is tightening. This is pushing up wages but not productivity. There is a consequential 'bounce' in domestic consumption. But what happpens next?

Well my native economic wits tell me that the relative prices of Japanese imports and exports should be affected. This is a complex question since Japanese conglomerates have a well-known 'two tier' pricing system, with the cost pressure normally being felt more internally than externally. So Japanese exports don't necessarily immediately lose competitiveness. Of course the Yen-Dollar rate also has something to do with this.

But in the internal market the price of imported goods should become relatively lower vis-a-vis domestic products. So I started thinking about the trade balance. And Lo & behold:

"Japan recorded its biggest trade shortfall in nearly a quarter of a century and its first in five years, as the normal January slowdown in exports and a rising oil bill combined to reverse a Y914bn surplus in December into a Y349bn deficit."

Well so far so good, this is what theory would seem to predict. Of course there are any number of one-off issue in play:

Economists said the latest number was not a cause for concern since exports normally fell in January because of the long new year’s holiday in Japan, which caused a slowdown in production and shipments.

but then there is this:

Higher imports partly reflected rising domestic demand, as well as the surge in oil prices....Hiroshi Shiraishi, economist at Lehman Brothers, said that, as domestic demand picked up, it was natural — and positive — that the economy would become less dependent on exports. “Going forward, we don’t expect net exports to provide a big boost to gross domestic product,”


Oh, oh.

In the fourth quarter, which showed annualised gross domestic product growth of 5.5 per cent in real terms, domestic demand outpaced net exports as a contributing factor, underlying the self-sustaining nature of Japan’s recovery.

Mr Shiraishi said the volume of imports had picked up 7 per cent in January as Japanese demand for foreign products increased. In yen terms, imports rose 27 per cent to Y5,360bn, spurred by a 67 per cent rise in the oil bill over the previous January.


Morgan Stanley's Takehiro Sato tries to be re-assuring:

"Takehiro Sato, economist at Morgan Stanley, said it was unwise to read too much into one month’s numbers. Weak exports to Asia probably owned to special factors, particularly the Chinese new year, part of which fell in January this year, he said."

He may be right, but then when theory and empirics coincide in this way there is food not for worry, but for thought. Maybe what we are all about to do is an exercise in ordinary language philosophy: checking out what the word 'sustainable' actual means in the day-to-day context.

Monday, February 20, 2006

Japan Back With The Leaders?

The FT's David Turner had this incredible article in the FT over the weekend (behind the great firewall I'm afraid):

Growth puts Japan back with the leaders

Unexpectedly strong growth in the last quarter propelled Japan's economy once again into being a world leader, promising an end to 15 years in the doldrums when periodic economic revivals dissolved into false dawns.

The world's second biggest economy grew 1.4 per cent in the fourth quarter – far in excess of the 0.3 per cent growth recorded in the US and growth of 0.4 per cent in the European Union.


Japan's economy once again a world leader? IMHO this is terribly premature and extraordinarily ill-advised. In particular it is clear just how ill advised it is if you read another article in the same newspaper (this time David Pilling):

"The tightening of Japan’s labour market is arguably the single most important sign that the country’s economy, after years of adjusting in the aftermath of the bubble, has finally normalised."

Wrong David, the tightening of Japan's labour market is a sign that Japan is an ageing society, with a shrinking available labour force. This is not a good sign: show me your productivity numbers is what I say. To plagiarise Solow, we can see the crowth everywhere, except in the productivity numbers. Methinks we are in for some rude surprises.

"As a result of increasing job security, consumers, who until recently had been running down their savings to preserve their living standards, have opened their wallets a little further. That has persuaded companies to invest in capital and still more workers to meet what is expected to be steadily growing domestic demand."

Of course what is happening in Japan is a first, something of a great experiment (although there are signs that something similar may be happening in Italy, another society with similar problems). There has been a lot of speculation about just how the fact that the forseeable labour shortage would lead to a 'capital deepening' process as labour became relatively more expensive. Well, labour is becoming relatively more expensive, so now we will get to see how the capital deepening part works out in practice. This will be an interesting test for neo-classical theory.

Here are links to some more, and equally revealing articles in the FT:

Japan 'creating sub-class of poorly paid

Huge changes in Japan's labour market are creating a dangerous divide between well-paid, well-trained workers in permanent employment and a sub-class of poorly paid workers with low skills and fragile job security, the Organisation for Economic Co-operation and Development has warned.

The report, which makes calls to tackle deflation and assert fiscal control, highlighted the downsides of greater labour market flexibility.


Fewer Japanese

The future has arrived slightly quicker than expected in Japan, with the news that last year, for the first time since records started in 1950, the country's male population fell. The decline was fractional, and could be totally attributed to more men moving out of, rather than into, Japan, probably because of company transfers. Nonetheless, this was a demographic outcome waiting to happen because of the country's falling birth rate, which set a record low in population growth of only 0.05 per cent last year. Japanese experts are now predicting that next year will see the first decline in the country's overall population.

The shrinking of the workforce and the swelling number of pensioners is a trend occurring across many developed, and some developing, countries. Indeed, thanks to its one-child policy, China is forecast to see the ratio of working age people to pensioners collapse from more than 6:1 in 2000 to fewer than 2:1 in 2050 as that country ages faster than any other in history.

Friday, February 17, 2006

Could This Be The Reason?

As noted in the last post, there has been a noteable movement of foreign investors out of Japan in the last week. Today we have news of a draconian report from the Japanese government Council on Economic and Fiscal Policy which indicates the country either needs major spending cuts or a sharp rise in taxes. When you couple this with the possibility of a steady rise in interest rates and the fact that wages are ticking up above productivity due to the kind of labour shortage an ageing economy will naturally produce, then you have to wonder whether some people haven't look at this report, put two and two together, and decided it's time to up-tent.

Japan’s government would need to cut more than the equivalent of its defence, education and public works budgets combined in order to balance its books by 2011, Junichiro Koizumi’s main policymaking body was told on Wednesday night.

The effort to prove the necessity of a tax rise to close the budget deficit – about 4 per cent of gross domestic product before interest payments – comes as the cabinet’s so-called fiscal hawks are losing ground.

Japan's Growth Spurt

Well the Japanese economy is certainly ticking along at a very lively clip: an annualised rate of 5.5% in the last quarter of last year. Quite something when you compare it to the somewhat meagre showing of the US economy ver the same period (1.1%). So should we draw the conclusion that the Japanese economy is in better underlying shape than the US one? I doubt it.

First of all, there is the nice old English expression that one swallow doesn't make a summer: 2005 growth for Japan was 2.8% compared to what - 3.6% or so for the US.

Secondly, we have been here before. In the last quarter of 2003 to be precise, when Japan registered in the unrevised numbers a rate of approximately 7%.

The big question is: is this sustainable? I still doubt it, and it seems the international investment set for once agree with me:


The Nikkei 225 fell 2.1 per cent to a three-week low of 15,713.45 on Friday, despite being pushed up briefly by strong gross domestic product figures. The fall was led by real estate stocks, which plummeted as foreigners – big buyers within the sector - continued to exit the Japanese market...........