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Sunday, August 20, 2006

Dooming and Glooming about Japan

And now for something completely different, a guest post from Danish Blogger Claus Vistesen:




Dooming and Glooming about Japan ... Is it too much?

It has been a while since I have reported on the excellent writings of the Economist's weekly column Buttonwood about economic and financial markets. And before we get into the actual topic I would like to offer my humble advice to the editors of the Economist's website and Buttonwood herself. Consequently, it is beyond me why The Buttonwood Column has not, a long time ago, been structured as a blog with permalinks to entries, entries archived chronologically, trackback features, categories, a blogroll, a decent commentary option (the one now is useless) and a unique RSS feed (does it have that?). I mean you could make these changes in an afternoon (or perhaps two :)) and the attention towards Buttonwood would increase more than ten-fold. The column would instantly get a prominent place on Alpha.Sources' blogroll as well as a welcome post although I am quite sure that its entry into the econ-sphere would be appreciated by all of us. End of rant ...

Now let us move on to the actual content of the Buttonwood column as it was updated last (8th of August) (Walled for non-subscribers). In this column Buttonwood takes on the Japanese economy and gives a vivid and precise description of two discourses; optimists and pessimists concerning the recovery of the previously deflation crippled economy. Regular readers of Alpha.Sources will know that I am (still) amongst the latter and since Buttonwood, at least reluctantly, places herself in the optimist camp there should be ground for an interesting exchange here.

'Quite a few such people [pessimists narrated as Western Money managers by Buttonwood] have been populating the lobbies of Tokyo's lusher hotels this summer, venting their spleen about Japan's economic prospects in a way that strikes local boosters, such as this columnist, as the grossest of ill-manners in a country where these things matter.'

And the bottom line of the pessimists;

'The naysayers point out that the blistering (for Japan) pace of economic growth has probably slowed sharply from its rate of more than 3% earlier this year, thanks to a slowdown in export growth, a destocking of inventories and cuts in public spending. Japan's economic fundamentals, they argue, are weakening, notably in business investment, the area that has until now generated the most excitement about Japan's recovery.'

Moving on the optimists;

'The boosters affect not to be too concerned about that. After all, the outlook for capital expenditure is bright, as reflected in the Bank of Japan's latest Tankan survey of business conditions, published last month. It shows growing optimism among companies, particularly large ones, which plan to boost capital expenditure by 12% in the fiscal year that began in April. What is more, non-manufacturing companies also feel confident enough now to invest.'

Now before we move on it is clear that what we need to really talk about here is the nature of Japan's recent growing growth rates. The quotes above implie that the growth has, to a large degree, been driven by exports which again means that in order for the recovery to be sustainable domestic demand has to pick up to at least some degree in order to carry the positive spiral on. And this is exactly where we need to be cautios I think ... Following Buttonwood further we find that this is also what distinguishes the optimists from the pessimists ...

Besides, boosters expect consumption to take up the running from investment as the main driver of domestic demand—just as business investment earlier in the four-year-old recovery took over from exports. Here, the naysayers, in their pinched fashion, point out that little sign of this recovery in consumption is apparent yet. Data collected by government surveys of households show that both consumption and disposable income were falling in recent quarters. Shops report sluggish or negative growth. Car sales are falling.

Buttonwood stands firm though ...

'This columnist attempts to gather his composure. Yes, consumption is patchy, but that's not the whole picture. As far as jobs are concerned, the outlook is bright. Labour markets in many parts of the island chain are tight and companies expect to do more hiring. As Mr Feldman points out, the number actually in work has been stable since mid-2003, despite a fall in the working-age population. This suggests that workers who dropped out of the labour force during the long slump have been keen to rejoin it'

So where is the Japanese consumtion patterns going and more importantly, will there enough and sustainable domestic demand to support the recovery and future growth? This seems to be the question does it not and although I cannot by no means give the answer it seems prudent to at least exhibit caution when we, after all, are talking about the world's oldest population with a TFR well below replacement level. In short; there might other reasons why labour markets are tightening. It definitely seems as if Japan has escaped deflation (for now) and this is good because this means a growing economy. In the end I do not want to be the wiser here because my argument drawn from the demographics of Japan has long term implications none of us can predict. Japan is certainly now in a much more virtuos circle than before where it was held back by the claws and fangs of deflation and this is good but I do not think we should expect a Tiger's roar from Japan; more like a faint miauww perhaps?