Japanese Exports and Global Recoupling

Claus drew my attention this morning to this interesting piece from Nouriel Roubini about global recoupling. Actually this post raises a number of points, all of them interesting ones, and some not as semantic as they seem at first sight.

But before we get into all of this lets take a quick look at the latest set of trade figures from Japan. As Bloomberg tell us:

Japan's exports rose to a record in October as companies shipped more cars and electronics to Asia and Europe, easing concern that a slowdown in the U.S. will cool the economy's expansion.

Exports climbed 13.9 percent from a year earlier, the Finance Ministry said in Tokyo today, double September's pace. That helped lift the trade surplus 66.1 percent to 1.02 trillion yen ($9.3 billion) as imports gained 8.6 percent.

Shipments to China and the European Union surged to the highest ever, cushioning a drop in exports to the U.S., where the worst housing recession since 1991 is crimping demand. Toyota Motor Corp.'s profit rose 11 percent last quarter, helped by sales of Camry sedans in Europe and Asia.

So this is, if you will, the headline grabbing story. Record Japanese exports, with a shift in emphasis away from the US and towards Europe and China. (You can find the details in this PDF here).


Now as we can see from the chart, Japanese exports have done very well indeed in value terms since the start of 2006, and have even held up very well in recent months:



If we look at the year on year chart for 2007, we will note a very strong rate of increase, and in particular how Octobers pace has bounced back from the slowdown noted in September:



But it is when we come to the actual export shares that things get really interesting, since we find that exports to the US actually declined year on year, while those to China and the EU have continued to accelerate (as they say, to some extent exchange rates matter) and indeed Japan is close to closing the trade deficit it has been running with China.




And this perhaps explains why a Japan analyst like Morgan Stanley's Takehiro Sato have been talking about "decoupling" in the Japan context, not because Japan's economy is being driven finally by internal demand (far from it), but because the direction of exports is changing, and in particular Japan is now much more sentsitive to growth in Europe and some emerging economies (Asean, China) than it is to upas and downs in the US.

On the semantics two sets of bipolar expressions seem to be going the rounds at the moment, "recoupling-decoupling" and the "hard landing-soft landing" tandem. This is not the time or the place to enter into what it is we might mean by "hard landing" (other than to say that I do not consider that a mere recession constitutes a hard landing, but it is worth thinking about what we mean when we talk about "decoupling-recoupling".

Basically there seem to be two versions of the "decoupling" thesis knocking about. The first of these (which is no very definitely going out of fashion very fast) was based on the idea that the global economy was finally decoupling from the US due to the fact that key global engines like Germany and Japan where (following in both cases lengthy periods of structural reforms) finally coming out of a long period of sub-par growth and achieving "home grown", domestic demand driven, sustainable recoveries in a way which would enable them to take more of the strain during what was perceived as being an inevitable US "correction".

Claus and I never actually bought this story, in particular since we never thought that domestic demand would recover in countries like Germany, Japan and Italy in the way in which many were expecting, essentially for age-related demographic reasons. I think history has, more or less, borne us out on that one.

But there is another sense of "decoupling" (which is the one Claus and I prefer to call "recoupling", although this is not recoupling in the way in which Nouriel Roubini uses the expression, which seems to refer to a renewed coupling to a US economy which is on the way down) and this is to do with the way in which certain emerging market economies (the EU 10, Ukraine, Russia, China, India, Turkey, Brazil, Argentina, Chile etc) are now accounting for a very substantial proportion of global growth (Claus and I have yet to do the detailed numbers on this, but suffice it to say that India, China and Russia alone will account for over 30 % of the growth in the global economy in 2007. This is a far cry from the central role which the US economy was playing in global growth in the late 1990s. So in this sense something fundamental has changed, and this is what Claus and I are calling "recoupling". This situation can be observed quite clearly in the two charts which follow, which are based on calculations made from data available in the IMF October 2007 World Economic Outlook database. Now, as can be seen in the first chart the weight of the US economy in the entire global economy has been declining since 2001 (and that of Japan since the early 1990s). At the same time - and again particularly since 2001) the weight of the soc called BRIC economies (Brazil, Russia, China and India) has been rising steadily. This is just one example - and a very crude one at that - of why Claus and I consider that demographics is so important, since it is precisely the population volume (and the fact that they start the process from a very low base, ie they were allowed to become very poor comparatively, for whatever reason) that makes this transformation so significant.

Again, if we come to look at shares in world GDP growth we can see the steadily rising importance of these economies in recent years.




So this is another type of "recoupling" (a very fertile metaphor this one, I think), and one which analysts like Richard Katz are missing I feel, when they continue to put considerable emphasis on the "round tripping" component in Japanese exports to the Asian Tigers and China (in the sense that many of these may be components for assembly and subsequent re-export) since I think we are seeing a growing element of autonomous local consumption driven demand in places like S Korea and now increasingly in China itself. Komatsu's recent decision to build a new factory inside Japan wasn't primarily driven by anticipated demand for earth moving equipment in the US economy it seems to me.

Komatsu Ltd., the world's second- largest maker of earth-moving equipment, said it will spend 5.3 billion yen ($48 million) to build a factory in central Japan to make excavators to meet rising overseas demand.

The company will spend the money on acquiring 104,500 square meters (26 acres) of land near Kanazawa port, and on construction costs of the factory, the Tokyo-based company said today in faxed statement. The plant, which will build excavators weighing 400 tons, will start production in August 2009 and will have a capacity to make 30 units annually.

Komatsu's investment follows domestic rival Hitachi Construction Machinery Co.'s move in increasing production capacity for giant excavators used in mining projects as demand expands in Indonesia, China and Russia. In January, Komatsu constructed its first domestic factory in 13 years to make large- size wheel loaders and dump trucks used in mining.

And looking at Japan exports in depth I really don't really see this indirect US dependence effect. Europe, China and Asean are all now very important for Japan, in their own right, and quite apart from the US cyclical connection. and then, of course, there will be India.

At the end of the day Nouriel Roubini certainly is right in the sense that most of the EU isn't decoupled in any strong sense from cyclical movements in the US, but I don't feel he is addressing the extent to which the global role of the US is reducing. Two processes seem to me to be underpinning this deline. Firstly there is the rise of the giant pandas (or pehaps the "bears", "pandas" and "elephants" following the "tigers" and the "lynxes", but well, I don't know, perhaps we are now gradually talking about all the animals imagineable across the entire human "zoo"), and secondly there is the ongoing slide in the dollar. Of course indirectly - and via the intermediary of a temporary upward structural shift in the euro - the former is really producing the latter as the Bretton Woods II architecture gets steadily ground down. So both the US global GDP growth share and its absolute value share are now on the slide, and with that, logically, the level of direct coupling between the global business cycle and the US one. Since, with domestic US consumption taking a hit from rising energy costs and the internal credit crunch, it may in fact be the case that a US economy in need of exports on a greater scale for growth may well be more coupled to the rest of the world than previously and in that sense some of the arrows on the flow charts may have changed direction.

Basically in both these cases does demography seem to be playing quite a central role, since it can help us understand both why those economies which have median ages over 40 (which of course are little by little becoming a larger and larger proportion of the G23 economies - although notably NOT the US, the UK and France) are not able to shoulder the burden of actually driving the global economy and are instead destined to ride on the backs of those economies which may be considered to form part of the new group of emerging economy growth leaders. As I say demography helps us understand both these phenomenon (and possibly even how they are interconnected) since the key factor in explaining why it is the above mentioned group of emerging economies who are leading the charge (and not another group, always stripping out, of course, those commodity driven economies which are themselves riding on the back of the global growth boom) is the attainment of near- or below- replacement fertility and with this the possibility of a "normal" (which is not we can now see <> as understood by neo classical economics) expansion wherein domestic demand begins to achieve the status of an autonomous and independent driver of growth. This process is also known as the demographic dividend and I have recently explained in detail how this is working out in the case of Argentina (and here in the case of Turkey).

So we do have some sort of "recoupling" process at work out there, but it is not clear at this point just how sustainable this is. China's economy is, for example (and is extremely well known) extraordinarily dependent on exports, and even if some of the weight of these exports can be shifted towards Europe, it is not clear that China can resist a slowdown in both Europe and the US, and clearly it is not clear that Japan can resist a slowdown in the US, Europe and China etc etc.

So even if the global economy is now recoupled when compared with the position we had at the end of the 1990s this does not mean that it has become "uncoupled", indeed as I have been arguing repeatedly globalisation now means that the global economy as a whole is more tightly "coupled" now than it has ever been.

There is another detail which I would wish to draw attention to here before signing off, and that is that not all the emerging economies are alike. I have already suggested that methodologically it may well be necesssary to strip out the high fertility oil exporters (Nigeria, the gulf states, Venezuela etc), but we also need to think about the cases of those emerging societies which have now had below replacement fertility for two decades or more. This would be principally the whole of Eastern Europe (including Russia) and of course China (with the one child policy). What is not clear in these cases is where they are going to get the labour supply from as we move forward to fuel both catch up growth in labour intensive sectors like construction and some kinds of manufacturing industry (the lower value added components) and the new human capital in sufficient quantities to make possible the rapid transition from one sector to another which is necessary to achieve the potential high rates of productivity growth.

This is why what has been happening in the Baltics and Bulgaria (where growing labour shortages coupled with construction booms are sending inflation rapidly through the roof) seems to us to be so important. The Baltic economies may - to use the words of the Economist - be "pipsqueaks", but they are a very useful and important laboratory. What, we need to ask ourselves, will happen if the "Balitic syndrome" spreads to Romania, and then to Poland? And what if Russia then follows in a domino like chain? And what, oh woe of woes, will happen if this process (really I would argue when, rather than if) reaches China (and just how far are we away from this possibility?). So with these rather preocuppying thoughts I will leave you on this rather grey and wintry day here in Barcelona. Recoupling is taking place, but which of the chain links will hold, and which will break. Aha, if only we knew!