Playing the Waiting Game in Japan

(cross-post from Alpha.Sources)

As I reported a couple of days ago on Japan the next few days would see the release of a slew of economic indicators pointing forward to the future course from the BOJ in Q3 and Q4 (with the nature of the just released data I find it very unlikely that the BOJ will jump-start markets with a surprise raise in July). These 'few days' have now passed and we can now do some kind of status. I managed to slip in, as an update, the report on industrial production in my post linked above. Generally, the result was disappointing from the point of view of expectations and given the trajectory of the numbers (see graph by Edward here) I noted the following;

Now, the interesting thing is I think that it could look as if the Q4 2006 capex bonanza could take almost two thirds of 2007 to unwind, especially if the the US economy continues to 'under perform.' If this is the case, the data on domestic consumption will be very important indeed.

To respond to that we might want to check out the recent data on consumption in May (Bloomberg article on both the latest CPI release and consumption expenditures). As reported, household consumption rose 0.4% on a y-o-y basis which indeed extends the increasing throughout 2007 up until May. Yet, 0.4% is not much and compared to last month it marks a relative decline compared to April of 0.7%. In this way I will stick to my prediction stating that despite what many are calling the revival of domestic consumption in Japan it is unlikely that we will push above the 1% threshold on an average y-o-y basis. This goes especially if we use seasonally adjusted data as our primary gauge. The figure below plots monthly changes on a y-o-y basis in consumption expenditures since May 2006.

Turning to inflation prices held steady in May posting a 0.1% decline y-o-y which was the same as the previous month, so Japan is still in deflation it seems. Another somewhat important data point was the inflation figures (core prices) from Tokyo which posted a 0.1% decline in June, its first slide in three months. This does not bode well for nationwide inflation figures in June. The graph below plots (according to the tale of the three inflations) inflation in Japan on a y-o-y basis from May 2006 to May 2007.

So, what does all this mean? First of all I think it has cast serious doubts on the future course from the BOJ. Clearly, the July surprise hike which has been much debated is out of the question I think. Another thing which is politically related is the fact that Fukui is set to step down in March next year. Clearly, he wants to leave the best possible kind of conditions for his successor; the question obviously remains then, will that make him/the BOJ more or less hawkish? A hike in August or September cannot be ruled out just yet I think and much will depend, I think, on the continuous tightening of the labour market (unemployment is stable at 3.8% in May) and whether this will have an inflationary effect. Furthermore, there is of course the headline inflation rate which is set, after a dip in the latter part of 2006, to continue its structural upward trend. Turning to international FX markets the show thus seems set to go on with the Yen reaching new lows fuelling sizzling growth in among other countries New Zealand where a refi rate of 8% is acting like an over dimensioned Yen magnet. I don't condone complacency but at this point and with the current relative benign global economic conditions not pushing up inflation in Japan it is just completely impossible for me to see how the BOJ ever will be able to close the gap to a degree which would make the carry trade unwind. In fact as I have noted before, I believe it is more likely that any narrowing of the interest differential between Japan and the rest of the world will come through the lowering of interest rates elsewhere.

Japan Industrial Production

The latest data on Japanese industrial production have raised some eyebrows. Below I am putting up a quick excel chart of manufacturing and mining output on a monthly basis since April 2006 I have just knocked out. (The raw data can be accessed from here).




The trend should be reasonably clear, and certainly the recent wave seems to have peaked back in December last year. Of course, as Claus was pointing out yesterday not everything is gloom at the moment. But the situation is complex, and for the time being we simply need to keep monitoring the data. It is however hard to envisage a rapid interest tightening process in this environment (especially when you look at this recent US durable goods release).

Japan’s industrial production unexpectedly fell in May from a month earlier, casting doubt on an anticipated rebound in output and raising the hurdle for the Bank of Japan to raise rates in the coming months. Industrial output fell 0.4 per cent in May from April, government data showed on Thursday, much weaker than a median market forecast for a 0.8 per cent rise and marking the third straight month of decline.

The weaker-than-expected reading hurt the yen, which slipped to near 123.35 to the dollar from 123.20.

Manufacturers’ output – the core component of production – is expected to rise 1.9 per cent in June and rise 1.7 per cent in July, the data from the Ministry of Economy, Trade and Industry showed.

Still, the ministry downgraded its view on output, saying it is flattening. That compared with the previous month’s assessment that output was in a moderately rising trend.

Industrial production fell in January-March for the first time in six quarters, but many economists thought the drop was a reaction to a sharp rise in October-December and that output would rebound in April-June.

The May output data may call such thinking into question and heighten worries over Japan’s corporate-sector strength.

Tokyo real estate still too expensive

Burbed came up with this link:

Japanese find sleep, shelter in cyber cafes

Men make use of the internet service in the private rooms of an internet cafe in Tokyo May 2, 2007. Some low-wage earning young people who cannot afford apartments in Tokyo are choosing to live in internet cafes, which are cheaper than a hotel and even offer showers, microwaves and large libraries of manga to read. Picture taken May 2, 2007. (Kim Kyung-Hoon/Reuters)

Cross post from Wasatch Economics...

Where There is Hope ...

Cross-post from Alpha.Sources

Small things matter in terms of the Japanese economy and especially when it comes to the indicators for domestic demand and inflation. As such, the next couple of days will see important releases on the Japanese economy which, according to the forecasts, are going to come out on the positive side thus further bolstering the BOJ towards a potential hike in August or September. The first data point which suggests this comes from the figures for retail sales in May which rose an almight 0.1% from a year earlier and 0.3% from a month earlier. Now, as Bloomberg never tires of pointing out, retail sales tend to understate domestic consumption in Japan since it excludes purchases over the interenet as well as services. Particularly the latter is important in Japan. On the other hand, the trade ministry also noted a strong seasonal component in this reading as especially warm weather added to the increase through food and beverage sales. All in all though, past experience suggest that these retail figures should provide a solid ground for a positive monthly reading of domestic consumption in May. On the inflation front there is no data out until the 29th but already now there seems to be grounds for 'optimism', at least given Bloomberg's compiled forecast which note that the decline in consumer prices probably stayed at -0.1 in May. Anonther measure of inflation which also shows signs of an upward tick in the indirect measures of inflation such as producer prices and whole sale prices. However, do note this ...

Higher costs of energy and raw materials are driving up Japan's wholesale prices of goods as well as services. Producer prices climbed 2.2 percent in May from a year earlier, a 39th month of gains.

The central bank's overseas commodity index of 16 raw materials, including crude oil and copper, climbed 3.7 percent in May from a year earlier, a fourth monthly gain.

Inflation of course is inflation and this is particularly the case in Japan where the headline inflation is lumped together with the more traditional core inflation index (core of core) and then there is also company service prices which rose, so some upward pressure is clear there ...

Faster growth in the costs companies pay for services such as transportation and rent may prompt them to raise prices, sparking inflation. Central bank Governor Toshihiko Fukui has said consumer prices, which fell in April for a third month, will rise over the long term.

The big question still remains I think whether this is because activity in Japan's domestic market is picking up the pace to any significant degree. Finally in terms of economic indicators we should also be looking out for factory output figures which are released tomorrow. As with inflation the forecasts are fairly bullish and more importantly, as quoted by Bloomberg, this report will be an important indicator as to the future course of the BOJ in terms of raising in August or September.

As another almost regular sequence in my notes on Japan I feel the need to refer to Morgan Stanley's Takehiro Sato who also has note up on the outlook on the Japanese economy. One of the most notable things to watch out for in Sato's analysis is his account of why wage pressures in Japan are still somewhat distant even if we take into account that the labour market is very tight. Note particularly the structural factors in terms of part-time workers and how the wage curve remains tilted towards elderly workers. Add to this, Japan's continuous demographic decline which will only intensify (save potential migration) over the next couple of years it is difficult to see how wages can be pushed up to support consumption. In this way and although this might appear to represent the same capacity issues in for example Latvia compared to Japan are very different. As such, the rapid wage inflation spiral which are now seeing in Latvia as a result of an ultra tight labour market is very different from Japan where it is predominantly the relatively sluggish domestic demand component on the back of the high median age that are holding down inflation. In this way it is difficult to see how Japan, with its current growth rate in domestic demand in the middle of this very impressive global growth spurt, would be able to sustain the kind of inflation expectations we would normally expect in this kind of labour market environment. This of course is even more true if we factor in the BOJ which is clearly biased towards raising on the back of 'future' inflation expectations. My worry as it has always principally been with Japan is that this is like preparing for a party to which the guests will never arrive.

Toyota and Honda increasing factory capacity in Japan

Brad Setser points to a WSJ article to the effect that "Toyota has invested three times as much in Japan as in North America over the past three years. Honda is building its first auto factory in Japan in nearly three decades. " The context of Setser's discussion is that exchange rates result in greater profits for these two companies from cars manufactured in Japan and sold in the US than from cars produced at US plants and sold in the US. The WSJ article notes that "Toyota has increased shipments to the U.S. of Japanese-made vehicles from 762,000 in 2004 to 1.27 million last year."

The key to this lies in the fact that a portion of the cash cost of producing cars at US plants has to be remitted from the companies' Japanese accounts to their US operations. So the weak yen increases the total cost per car produced in the US. The revenue per car sold in the US is the same whether it is produced in Japan or the US.

I don't see this as really being a political issue in the US as long as Toyota and Honda don't actually cut production at their US plants. Since both companies are gaining market share vs the Detroit automakers I don't think that they would need to cut US production. Certainly, the US trade deficit with Japan has and will increase as this trend continues, but the US focus on China at this point has really put Japan on the back burner as far as trade issues go.

Summer Bonus Season

Just following up on Scott's point here, there is more news from Bloomberg this morning:

The yen traded near the weakest in more than four years versus the dollar and a record low against the euro on speculation Japanese workers being paid bonuses this month will invest overseas for higher returns. Finance companies will market more than 1.5 trillion yen ($12.1 billion) of foreign-currency investment trusts before the end of June, according to data compiled by Bloomberg. The lowest borrowing costs in the industrialized world have prompted investors to take out loans in Japan to buy higher-yielding securities in so-called carry trades.

Workers in private companies are expected to receive summer bonuses totaling 15.6 trillion yen, up 3.1 percent from a year earlier, according to Mitsubishi UFJ Research and Consulting Co., Ltd. Per-worker bonuses may average 423,000 yen, up 1.7 percent from a year earlier, said senior economist Shinichiro Kobayashi.

Japan's Shifting Trade Surplus

The big headline today is the increase in Japan's trade surplus, but the important news behind the headline is the shifting composition of Japan's exports. According to the Financial Times:

Japan’s exports rose 15.1 per cent to a record high for May, but brisk imports and sluggish shipments to the US meant the trade surplus rose a slower-than-expected 9.3 per cent from a year earlier.

Exports rose to Y6,565bn, the 42nd consecutive monthly increase, according to preliminary finance ministry figures released on Thursday. But imports rose an even faster 15.5 per cent, to reach a record Y6,176bn. Economists say the heftier import bill largely reflects higher prices resulting from a weaker yen rather than stronger demand.

Examining the data more closely we find that exports to the US in value terms rose by only 0.4% (m-0-m), following a fall in April. As a result Japan’s surplus with the US fell 13%, the second month of decline. It is also worth noting that these exports are being propped up to some extent by the weaker yen, and it seems demand from the U.S. may remain slow in the coming months. Shipments to the U.S. measured by volume fell 13.2% in May, little changed from the 13.1% drop in April.


On the other hand exports to the rest of Asia and Europe seem to be booming. The trade surplus with the rest of Asia widened 22.6% to Y534bn in May. The trade deficit with China also shrank slightly to Y210bn on the back of a 25% surge in exports. At the same time exports to the European Union surged 17.9%, the fastest pace since August 2006, to 971.1 billion yen.

It is important to note that net exports - the difference between exports and imports - were the biggest contributor to GDP growth in the first quarter, helping Japan's economy expand at an annual 3.3%. This dependence is likely to continue going forward and it still remains to be seen what the real longer term impact of slower export growth to the US is going to be.

More on Japanese retail investors participating in carry trade

According to Marketwatch,

"Analysts said the yen has also been pressured by growing appetites for risk among Japanese individuals who are borrowing in yen to fund positions in higher-yielding currencies. Currency trading by Japanese individuals rose to record $11 billion per day in the fiscal year ended in March -- a threefold increase from a year earlier, according to figures from Tokyo firm Yano Research Institute Ltd. as cited in a Bloomberg report Yano Research publishes an annual report on Japanese currency trading."

It is one thing to take yen that you've saved up to speculate in foreign exchange; it is quite another to speculate on margin. This isn't likely to end well for a significant number of these individuals...

Japan's Low Fertility

Earlier this month the Japanese Health Ministry revealed that the Total Fertility Rate (TFR) recorded in Japan rose slightly - to 1.32 babies per woman - in 2006, a figure which is up from the record low ever of 1.26 recorded in 2005.

Japan's fertility rate rose last year for the first time in six years in 2006, while the number of suicides fell below the 30,000-case mark for the first time in four, the government said Wednesday.

``The latest figure alone doesn't indicate whether there is a turnaround in the country's recent trend of falling number of births,'' said Emi Sato of the vital statistic division with the Health Ministry.

Japan's fertility rate was 1.33 in 2001, 1.32 in 2002 and 1.29 in both 2003 and 2004 - the lowest figure since the government began releasing fertility rate data in 1947, according to the ministry.

Last year, the number of births in Japan totaled 1,092,662, exceeding the number of deaths by just 8,174, the report showed. Marriages in Japan totaled 730,973 last year, up 16,708, while divorces totaled 257,484 people, down 4,433.

But before we all start jumping up and down with joy about this, it should be noted that the increase is very small and that the Health Ministry itself is warning that the reading may well be in part a statistical construct, with the TFR possibly once more dropping slightly in 2008.

For those interested in a fuller assessment of the longer term fertility situation in Japan, this article by Toru Suzuki in the March 2006 edition of the Japanese Journal of Population makes a good read:

Fertility Decline and Policy Development in Japan

As Suzuki notes:

The Japanese government was shocked with the TFR of 1.57 in 1989 and launched a variety ofpronatal policy measures.

As he also goes on to suggest the Completed Cohort Fertility Rate (CFR) is a more accurate measure of fertility than the TFR, because the latter suffers from tempo distortion and the so-called "parity composition" effect (for an explanation of some of this we have this post on my Demography Matters site).

Suzuki is none too optimistic that Japanese CFRs are going to rebound all that significantly (ie to anywhere anywhere near replacement level) even in the medium term:

Although the 1955 cohort was behind its predecessor in the early twenties, it succeeded in catch up and will fulfill a near replacement level. However, a significant decline in the CFR for cohorts born after 1960 seems to be inevitable. The cumulative fertility of the 1960 cohort is 1.84 at age 43 and will not reach 1.9 eventually. Though it is difficult to predict the CFR for cohorts born after 1965, the postponement in the early twenties seems too serious to be compensated later. Thus, the CFR of younger cohorts in Japan can be as low as 1.6, which is predicted for Italian cohorts.


Now I think it is important to try and understand the Japanese fertility situation in a more general international context. With this in mind it is worth noting that the Economist has an informative and interesting (if somewhat complacent) article on European fertility this week, and I have a pretty lengthy post on A Fistful of Euros which goes through the main issues raised.

There seem to be two central points here is

a) that there is no such thing as "European Fertility", but rather there are various patterns (the Economist divides Europe in two, I try to be a bit more subtle, and distinguish between four groups of countries)

b) that low European fertility cannot be looked at in isolation, since it forms part of what is effectively a global phenomenon, as birthrates steadily drop in country after country across the planet. The situation in China after many years on a one child policy is by now well known, as is the situation which prevails in Japan. Less well known perhaps is that several states in Southern Indian are now with below replacement fertility (and apparently heading down to the lowest-low bracket) as is, for example, Thailand.

Before going any further I would like to stress yet one more time that I am NOT a demographer, but a macroeconomist, a macroeconomist who has simply become interested in demographic processes due to their evident interface with economics.

I would now like to go on to address what Japan has in common with what is happening elsewhere, knowing full well that in each and every case there are also "country specific" features.

Various explanations for the generalised below-replacement phenomenon have been offered, some of them social and some economic. Undoubtedly there are a number of factors at work, but for present purposes I want to highlight two points:

i) In some form or another the fertility decline is associated with the process of economic development (one immediately might think here of Becker's child investment thesis, and the substitution of quality for quantity), and in particular what are termed the lowest-low levels of fertility (TFRs below 1.3) seem to be associated with very rapid rates of economic development (the Asian tigers and southern Europe might be considered good examples here). Since the big economic news since the late 90s has been the very rapid economic growth which is taking place in a large wedge of emerging economies, there would seem to be prima facie grounds for fearing that this lowest low fertility level may arrive in an increasing number of countries, and comparatively soon.

ii) The growing disconnect between those countries who fall below replacement level, but then steadily recover ground - typical cases here would be the US, France, the UK, Ireland, and Scandinavia generally (these could be increasingly considered the "outlier", special-case countries, although of course they themselves are a pretty heterogeneous bunch) - and the "other group" (ie the increasingly "path normal" countries) where fertility falls below the (apparently) critical TFR 1.5 level, and then subsequently fails to break upwards again (and here of course Japan would seem to be a good example of the phenomenon).

Why this latter process of trawling the bottom is the case is in fact the big headache we all face. The persistence of this below 1.5 TFR phenomenon has lead the Austrian demographer Wolfgang Lutz to formulate a low fertility trap hypothesis (LFTH). The first point to make would be that this trap idea is simply a hypothesis awaiting confirmation at this point. Lutz identifies three mechanisms which might be operating in perpetuating the trap:

a) Negative population momentum
b) Ideational factors
c) Economic processes

On the negative momentum situation, one Japanese newspaper recently made the following point:

".... In the future, there is expected to be a phenomenon in which the number of births declines but the birthrate rises. Because of this, some experts say the number of births is a more appropriate measure than the birthrate for evaluating government policies and for setting targets".

Well, this is negative momentum at work. After decades of below replacement fertility the cohort base is continuously reduced and as a result fewer and fewer children arrive (as shown in this recent post on Germany) regardless of anything other than very sizable (and pretty much inconceivable) movements in the fertility rate. It is hard to overstate the corrosive impact of this process on the population pyramid in the longer term.

This momentum factor on its own does not, however, generate a fertility trap, since it does not affect "fertility" directly. However, it may be a factor which has an indirect impact via the processes characterised as (b) and (c).

(b) Ideational mechanisms: the idea here is simply that in an environment where very few children are actually being born, the woman's idea of "ideal family size" may change. Thus the negative population momentum which produces comparatively few children may impact in this way. The phenomenon being referred to in some Japanese media as "parasite single women who adamantly refuse to marry and bear children" may indeed be one example of this process at work (remember, the two child family is in many countries a very recent phenomenon, and with rather few deep social roots), but if indeed something like this does exist in Japan it is only a culturally specific example of a more general process. Around 25% of German women now remain permanently childless.

Economic mechanisms: Well one example of this would be the impact of structural reforms on seniority bonuses in Japan:

"As age-wage curves flattened in Japan, women can no longer marry to become full-time housewives, as in general their husbands' salaries aren't going to rise enough to make for a comfortable living."

I think a long and pretty obvious list of similar economic determinants which influence fertility decisions could easily be drawn up. For the LFTH to work, however, these need to contain an element of circularity (ie they need to be economic processes which are in part driven by ageing and low fertility in the first place), and I think it is not sufficient to draw attention to a phenomenon with a general impact like globalisation.


My own work as a macroeconomist in part relates to this, and I have been pretty focused of late on internal imbalances in the eurozone, and what (if any) relation these may have with differential rates of population ageing as between countries (and, thus, by implication, differential fertility, since those who are ageing most rapidly are those whose fertility continues stubbornly to remain below the TFR 1.5 level).


I think, if we look at the three most "elderly" societies in terms of median age - Japan, Germany and Italy - we can now begin to discern certain "stylised facts":

a) Ongoing weaknesses in domestic consumer demand
b) absence of housing booms (since 1995 in the European cases)
c) Comparatively high rates of personal saving, which then begin to decline
b) Increasing structural dependence on exports for growth
c) Lack of attractiveness as a destination for migrants
d) An increasingly flat wages curve (across time) despite demographically driven labour market tightening
e) Growing government deficit issues and dilemma's about how to fund
health and pension systems, with a tendency to try and load the cost onto the tax system rather than reducing provision.


Now it is evident that there is some variance between countries in the level of "fit" here. Italy for example, has experienced very low economic growth (even during the recent global spurt) precisely because it has (for political gridlock reasons) been unable to make the kind of reforms we have seen in Germany and Japan, and thus has been able to achieve export lead growth. Unfortunately this is bad, rather than good news for Italy. Likewise Italy has been receiving rather more migrants of late than in the past, but at the same time has been having a large human capital deficit on the migrant flows, since the Italian economy simply is not able at this point to generate the kinds of employment which many educated young Italians need, and hence as unskilled migrants enter educated Italians leave. (This has also been happening to some extent in Germany, and I would be very interested if anyone had information on this vis-a-vis Japan).

The main point about the above list - were future data to confirm these trends - is that (as a complex) they all tend to reinforce birth postponement decisions via their impact on the economic well-being of young people. This is especially true of (e), where young people are, via the tax and contributory systems having a growing burden placed on their shoulders. This tendency could become even more pronounced as a majority of voters come to be over 50.

Japan's retail carry trade

It seems that Claus and I have been thinking along the same lines recently, that the increase in currency trading by individuals in Japan is particularly noteworthy. One fact from the Bloomberg story that Claus pointed out is that

"In Japan, individuals have opened 600,000 so-called margin trading accounts at brokerages that lend money for currency bets, 80 percent more than a year ago, according to Yano Research."

Margin trading is a treacherous endeavor; it could end up badly for the retail investor. Investment banks tend to have the ability to absorb losses when the foreign exchange markets turn against them; retail traders are not likely to have that much of a cushion. Margin trading by individuals strikes me as a fad that will eventually result in significant losses for a significant proportion of these people. It is an analog of the day-trading of stocks that was popular in the US a few years ago. Simply trading with their existing holdings of yen savings would be a better tactic for trading on the lack of good investment opportunities within Japan.

That said, I think it is interesting that retail traders

"are the bane of professional currency traders,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., who has been trading in Japan's capital city for 25 years. ``It's becoming hard to make money as the dollar-yen doesn't move as it used to, because of their constant buying on dips.''

Clearly, retail trading is a new factor that professional traders hadn't taken into account.

Those Savvy Japanese Housewives

(Cross-post from Alpha.Sources)

It has been a while since I have last reported on Japan so let us start with the basics which you may or may not already know. Last week the BOJ chose, as expected, to hold yet again on the continuing dim outlook for wages and inflation in Japan. Economic momentum as measured by investment and domestic demand seems to be doing fairly well but at the end of the day uncertainties remain the driver of the BOJ's reluctance to raise. However, SeekingAlpha reports that analists on a whole see the BOJ raising to 0.75% come August. This is all well and good of course but do remember here that the market sentiment is heavily biased at the moment riding on this 'global interest rate hike' narrative; especially since the yield on the 10 year treasury broke the magic 5% marker recently. All this of course could very quickly be deflated again if the data turns. As for the BOJ I expect it to data-driven as always with focus on wages and prices as well as domestic demand and it remains to be seen whether inflationary pressures will settle in Japan anytime soon, I have my doubts and I pretty much agree with Morgan Stanley's Takehiro Sato who sees Japan in deflation for the remainder of 2007. See also Sato's latest analysis on rising bond yields from a Japanese perspective. The continuous tightening of the labour market will be important here and of course the point at which the NAIRU actually is situated. The latest bid I saw was 3.5% and with unemployment currently running at 3.8% we will have to wait a little bit more it seems. Another thing would be to actually sit down and think about the whole situation in Japan and what the NAIRU actually 'means' in a Japanese context :).

Another point I want to highlight on Japan while I am here is this recent Bloomberg report on how Japanese housewives are increasingly joining the big institutional players on the carry wheel. Of course, these are basically the only retail investors who are able to do this since they have easy access to the currency (Yen) in the short position of the bet. All those leveraged bets from Japanese retail investors are of course keeping the Yen low much to the annoyance of forecasters persistingly looking for a pick up in the Japanese currency. The weapons of choice in terms of the long position ranges from the Kiwi (NZD), AUS, Real, GPD etc.

Japanese businessmen, housewives and pensioners betting against the yen in their spare time are wrecking the forecasts of the world's biggest currency traders.

The yen has slumped 4.6 percent to a 4 1/2-year low against the dollar this quarter, making it the worst performer among 72 major currencies and confounding predictions by strategists at Deutsche Bank AG and UBS AG for gains of about 1 percent.

The banks didn't reckon on the risk appetite of Japanese individuals, who are borrowing money like never before to buy currencies with higher yields. They tripled their trading in the year ended March to a record $11 billion a day, according to Tokyo-based Yano Research Institute Ltd., publisher of an annual report on the business. Globally, currency trading by retail investors rose 54 percent in 2006, according to research firm Greenwich Associates in Greenwich, Connecticut.

``Japan's interest rates are too low,'' said Hiroshi Ono, a 40-year-old sales clerk at a telephone company in Tokyo. Ono said he has made about $17,000 since March by borrowing $200,000 of yen and buying U.S. dollars to take advantage of the 4.75 percentage-point difference between Japanese and U.S. interest rates.

Japanese investors are borrowing yen at the central bank's 0.5 percent overnight lending rate and buying higher-yielding currencies in New Zealand, the U.K., Australia and even Brazil to increase returns on 1,536 trillion yen ($12.5 trillion) in savings. The strategy is called the carry trade.

All this is very interesting I think for two reasons. Firstly it will be interesting to how this affects short term consumption and saving patterns in Japan. At the end of the day this radical and rapid deterioation in the Japanese 'home bias' (see Stephen Jen) reflects a rigorous search for yield and to the extent that Japanese housewives keep on churning in on their FX market bets we should perhaps expect a pick up in consumption? Secondly, it raises obvious question on the nature of global capital flows and contrary to traditional textbook theory in which a large current account deficit should weigh on the currency some countries are almost sucking up too much capital from the point of view of macroeconomic stability. New Zealand and Australia are cases in point; who would have thought that a country with an external deficit would intervene in FX markets to actually depreciate its currency?!

As a friend pointed out to me in a mail:

This is financial globalisation really hitting home (another example might be the Austrian refi market in the
late 90s). So all this is going to be very important, it will now be much more difficult to refer to long-standing cultural differences.

Indeed, and it will be interesting to see what happens next especially bearing in mind the potential drivers of capital flows in the long run.

Outflow of yen from Japanese savers accelerating

That is according to Bloomberg, which has a story today describing how, referring to yen flows:

``It's reaching the point where the central bank must take rate action,'' says Hiromichi Shirakawa, a former Bank of Japan official and now chief economist at Credit Suisse Group in Tokyo. ``Capital is flowing out of Japan too quickly, making the economy vulnerable to currency fluctuations.''

Driving the flows are individual Japanese, of whom "a growing number... joining fund managers in shifting money out of Japan"... ""The bank is worried that when the carry trades unwind, households will get burned,'' says Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo. "..

The Bloomberg post mentions Japan's demographic situation, quoting Dai-ichi Life Research Institute: "A wave of retirees is likely to increase the flow even more. The first of Japan's 7 million baby boomers reach the retirement age of 60 this year, triggering lump-sum payments that will total 50 trillion yen for those born between 1947 and 1949"... the expectation is that those lump-sum payouts will be invested overseas...

It appears that the Japanese finance authorities are approaching a point where they will have to make a decision on their monetary policy that will have a major impact on Japan's economic situation for an extended period of time...

Unemployment in Japan

Now as we have been noting here on JEW over the last months, unemployment in Japan is trending steadily down, as can bee sen in the graph below which comes from the Labour Force Survey of the Japan Statistics bureau:



Now in part the decline in unemployment is a natural response to the - largely export driven - extended economic boom Japan has been enjoying recently, but this is certainly not the WHOLE story, since Japan, as is well known, has an ageing population, and in addition the population is actually now declining (and has been since 2005), as, of course, is the population of working age (and hence the workforce, if we take this as the conventional 15-65 age group, but see below). As such, absent immigration (and generally speaking Japan does not have any immigration worthy of mention as can be seen in this post) it is hard to see where Japan will find the labour to sustain economic growth into the future.




(Please click on image to see more clearly).

This chart has been extracted from an excel file which constitutes Table 1 on this page.

Now what can be readily seen is that while the total population started to decline in 2005, the working population (which is Japan is defined as everyone OVER 15) has been climbing (albeit slowly and steadily) for the last couple of years, a feature which is undoubtedly due to the growing proportions of the population in the older old age groups, and slowly increasing life expectancy. On the other hand, if you look at the totals for employed people, you will see that this actually peaked in the late 90s, and while the number has been climbing of late, we have still not reached the peak achieved at that time.

Although the data in the table is not seasonally adjusted, and thus difficult to intrepret, there does seem to have been a significant jump in employment in May 2007 (up to 64,440,000 from 63,351,000 in April, although this may yet be revised). Until we see more data it is hard to know exactly what to make of this, since in general we have been seeing signs that the Japanese economy has been slowing somewhat in 2007.

On point which is also worthy of attention is the percentage of employment which is part-time. This has been growing, and was up to 29% of total dependent employment in 2005 from 19% a decade earlier (this being the latest data I have to hand).

Another aspect which should not be forgotten is that the Japanese are fairly long-living, and participation rates in the higher age groups are high by international standards, as the chart below indicates.



So, all in all, a rather puzzling picture, where one thing seems clear, the current expansion is going to hit labour capacity limits at some point or another.

Update

I have now found some more data on part-time employment as a percentage of total employment. In April 2007 - according to the Provisional Report on the Monthly Labour Survey - there were 11,352,000 part time jobs, and 32,770,000 full time ones, which means that roughly 26/27% of employment was part-time. The Report also makes the following observation:

"Regular employees in April 2007 were increased by 1.6% compared with a year earlier, full-time employees were increased by 0.8%, part-time employees were increased by 3.6%."

Which seems to suggest that part-time employment has been growing rather more rapidly that full-time in recent months.

In line with this observation, the March Report says this:

"Regular employees in March 2007 were increased by 1.5% compared with a year earlier, full-time employees were increased by 0.9%, part-time employees were increased by 3.2%."

The February report says this:

"Regular employees in February 2007 were increased by 1.6% compared with a year earlier, full-time employees were increased by 0.7%, part-time employees were increased by 4.2%."

January this:

"Regular employees in January 2007 were increased by 1.6% compared with a year earlier, full-time employees were increased by 0.9%, part-time employees were increased by 3.3%."

December this:

"Regular employees in December 2006 were increased by 1.4% compared with a year earlier, full-time employees were increased by 0.9%, part-time employees were increased by 2.9%."

So the trend towards part-time work is definitely there, and this is obviously being reflected in average salaries. What will be interesting to look at will be the May 2007 data, to see how much of the new employment this month is part-time.

To get a final idea of what all this means I have looked at the earliest data in this series, for September 1998. At that time there were 34,755,000 full-time employees, which we could compare with only 32,770,000 in April 2007, so in the last ten years the number of full-time jobs has actually FALLEN by nearly 2 million jobs. At the same point the number of part-time jobs was 6,788,000 while by April 2007 this number had risen to 11,352,000, ie it had nearly doubled.

Immigration In Japan

Since the Japanese labour market is tightening all the time, and this process must have a limit given the declining labour force issue, I thought I'd take a look at the Japan immigration situation, and I found the graph I am posting below, which makes pretty sombre viewing. I think it shows what they call "flatlining".

Net Migration Compared. EU, USA and Japan



Source: OECD, Labour Force Statistics.
The vertical axis shows inward migration in thousands.
Click over image to enlarge

Net migration here is measured as the difference between the total population on 1 January and 31 December for a given calendar year, minus the difference between births and deaths.

Searching around for more info on the situation I found this useful article one migration information source: Japanese Immigration Policy: Responding to Conflicting Pressures, by Chikako Kashiwazaki, Keio University and Tsuneo Akaha, Monterey Institute of International Studies:


As of the end of 2004, 1.97 million foreign nationals were registered in Japan, accounting for about 1.6 percent of the total population (127.69 million) and representing a 1.3 percent increase from 1.7 million in 2000. (See Table 1.)

Koreans composed the largest group (607,000), followed by Chinese (488,000), Brazilians (287,000), and Filipinos (199,000). Well over 90 percent of resident foreigners came from either Asia (74 percent) or South America (18 percent).

Approximately 41 percent of registered foreigners are permanent residents, including 466,000 "special permanent residents," or former colonial migrants and their descendants.

The overall trend toward the settlement of newcomer immigrants is also indicated by the rise in the annual number of permanent resident authorizations, from less than 10,000 in 1996 to nearly 20,000 in 1999 and to 48,000 in 2004. The "permanent resident" status, for which there is no limit to the length of stay in the country, differs from the long-term resident status noted above. Meanwhile, approximately 15,000 people, mainly Koreans and Chinese, have been naturalized every year.

Among Koreans, many were students; the Chinese were generally trainees and students; and nearly 40 percent of the Filipinos arrived with "entertainer" visas. The "entertainer" status is given to actors, singers, dancers, and professional athletes; it permits an individuals to work in Japan for three months, six months, or up to one year.

One visa category that has received public scrutiny in recent years is that of "entertainer." This classification has been used by known and suspected criminal groups in Japan and abroad to bring prostitutes into the country. The government has begun enforcing stricter procedures for screening employers and employees in the "entertainment" industry and heavier punitive measures against violators.

the ageing of the population — and the beginning in 2005 of a population decline — have raised the urgency with which Japan must alleviate labor shortages and fiscal burdens resulting from these demographic trends. In particular, the business community has stepped up its call for a relaxation of labor-import control.

In response, the government has begun to consider relaxing restrictions on employment of certain categories of workers for which there are serious labor shortages, such as medical doctors and nurses. Foreign doctors and nurses must pass Japan's national examinations (ie written exams in Japanese) in their respective fields before they are allowed to practice.


I think the last point especially - about the exams for nurses - gives some idea of just how grave this situation is, and is likely to become, in the context of the severe demographic challenges Japan is facing.

This extract from an April 2007 issue of migration news is also informative:

Japan had two million foreign residents in 2005, up from 1.4 million in 1995. Two-thirds of the foreign residents are permanent residents, including Koreans who have been living in Japan for decades; there are 519,000 Chinese. The number of foreign workers was 180,000 in 2005, up from 155,000 in 2000 and 68,000 in 1990.

The sharpest increases have been in categories of foreigners who work but are not considered workers under labor law. The number of foreign trainees was 3,300 in 1990, 30,000 in 2000, and 87,300 in 2005. Most were Chinese, and many paid brokers $2,000 to $3,000 to get three-year jobs in small firms that pay $500 a month; trainees are also supposed to receive training. Some trainees leave the employers to whom they are assigned, citing long hours or abusive treatment, which subjects them to deportation.

JITCO, which administers the trainee program, says that it knows there are abuses, but says it lacks the authority to make unannounced inspections of Japanese firms with trainees. A 2005-06 study that relied on unannounced inspections found violations at 80 percent of the firms inspected.

The number of foreign students working part time rose from 11,000 in 1990 to 59,000 in 2000 and 100,000 in 2005.

The nikkeijin are descendents of Japanese migrants to Brazil and Peru. They began to receive three-year residence visas in 1990, and their number in Japan was 71,800 in 1990, 221,000 in 2000, and 240,000 in 2005. They do not have to work and can extend their three-year permits and change employers in Japan, and some of the jobs they abandon are filled by foreign trainees. Their children, born in Japan as well as abroad, are having difficulty integrating into Japanese society- many are neither employed nor in school.

The number of foreign overstayers was 106,500 in 1990, 232,000 in 2000, and 194,000 in 2005.

The first 15 Filipino nurses arrived in Japan to begin training to be health-care workers under a free-trade agreement between the countries. However, implementation of the broader free-trade agreement that is expected to increase migration has been delayed until Spring 2008.

The Japanese government continues to struggle to develop a migration policy. It seems clear that the foreign workers with the fewest rights, foreign trainees, often subsidize small firms that might be forced to close if low-wage workers were not available. The Neikejian, with more mobility, are able to find jobs shunned by local workers with the subcontractors of major firms.