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Friday, August 31, 2007

Unemployment and the Japanese Labour Force

I'm afraid there are going to be rather a lot of charts on this post, since it is a complex story, and it is important to try and understand what is happening to unemployment in Japan, since if you don't you won't get to see why this recovery isn't a "normal" one. First off the statistics bureau have published the July monthly results from the Labour Force Survey. The headline story is, of course, that unemployment has dropped for yet one more month, and of course this is the principal story that the financial press serve us up.

But Friday’s economic figures also contained material for hawks at the BoJ, should they wish to use it. ...... the unemployment rate inched down 0.1 percentage points to a nine-year low of 3.6 per cent, suggesting tight labour demand will eventually create price pressure through higher wages.
Financial Times

Employment prospects improved. The jobless rate fell to 3.6 percent in July, the lowest since February 1998, from 3.7 percent. A ratio that shows how many positions are on offer for each job seeker held at 1.07, near a 14-year low of 1.09. "Steady improvement in the job market is a positive thing, but the question is when that's going to feed through to wages,'' said Hiroshi Shiraishi, an economist at Lehman Brothers Japan Inc. in Tokyo. "The consumption data in July was affected by one-time factors, but spending is decelerating.''
Bloomberg


So now lets take a look at the charts. First off the unemployment rate has been, as we can see easily enough, dropping steadily:



But this doesn't tell us the whole story, not by a long way it doesn't, since Japan has a rapidly ageing population, and hence the numbers of people in all the younger age groups is steadily declining. So let's look at the numbers of people actually in employment.



Well, as we can see here, the numbers of those employed have fluctuated, the number was dropping from last October, but did start to pick up again in March, and has now started to fall back again since May. The only point I wish to establish here is that, in the context of an ageing population, a drop in the unemployment rate is perfectly compatible with a falling number of persons employed, and as such the unemployment rate doesn't tell you that much about the earning capacity of the entire population.

But the situation is even more complex. If we look at a breakdown of what are classified as "regular employees" we will see that while the total number of such employees has been pretty stationary for some years now, in fact the number of full time employees has been dropping steadily since the late 1990s (Japan's structural reforms). What this reflects in part is that older workers retire from their full time employment and subsequently take up part time employment. This latter is less remunerative, and this, in part, explains the downward tendency in wages and salaries.




But the situation is even more complicated, since what we have above are the data for regular employees. But there are, of course, "not-regular" employees, and not a few of them actually, as can be seen in the following chart.



Well, there is more detail to go into on all this, especially in terms of participation rates and how this all affects earnings. But I think by now I should have made my point. The headline unemployment number doesn't tell you very much at all in Japan, and anyone who tries to use it to tell you that earnings push inflation is coming is selling you a pup, that is what they are doing.

Japan July 2007 Industrial Output

Numbers released today by the Ministry of Trade, Economy and Industry showed a fall in industrial production in July, a development which will provide further encouragement for BoJ bearishness on interest rates. Industrial output fell a seasonally adjusted 0.4 per cent from June.





In this case it doesn't so much seem to be the weather which is being given the reponsibility, but rather the earthquake:

``Industrial production was affected by the earthquake, but if you look at the outlook, we needn't be too concerned,'' Economic and Fiscal Policy Minister Hiroko Ota said at a regular press conference in Tokyo.

However, if we look at the chart for the rate of annual increase by month, we will see that this has now been slowing since February, and maybe my memory is short but I don't recall earthquakes in March, April, May or June.


Japan July 2007 Income and Expenditure Survey

Spending by households dropped in Japan in July for the first time in seven months, according to data released today by the Statistics Bureau. Here's the chart:



As usual, we are being told that the weather is the problem:

Spending by households unexpectedly dropped for the first time in seven months, as a typhoon kept shoppers at home and a tax increase weighed on sentiment.
Bloomberg

In fact, just a quick look at the chart should tell you that we may now be resuming a trend which was all too evident across a big part of 2006, typhoon or no typhoon. We haven't seen any upward movement in consumption worth speaking about since May. now

Japan Consumer Prices July 2007

Japan remained mired in deflation for the sixth straight month in July, according to figures published by the statistics Office today that showed a 0.1 per cent fall in core consumer prices (excluding fresh food) over July 2006. The news obviously will make it even harder for a Bank of Japan which was already struggling to find arguments to justify a raise in interest rates at its September monetary policy meeting. Indeed the odds on a rate rise this year (or even this business cycle) now seem to be reducing rapidly.

Here is the chart of the index itself:



And here are the year on year percentage changes for the three principal indexes. As can be seen we are back in deflation across the board since January.



Comment

Only a few months ago, an autumn rate rise had become the consensus view among Japan economists. But since then, turmoil in global credit markets and a fall in Japanese share prices have generated a wait-and-see attitude among BoJ board members, making them reluctant to raise the benchmark rate above its current 0.5 per cent level. Thursday’s weak retail sales figures, and Friday’s evidence of continuing deflation, make a rate rise in September even less likely.
Financial Times

The reports bolstered speculation the Bank of Japan will delay raising interest rates until it can gauge the effects of the U.S. housing recession on growth in the nation's biggest export market. Expectations of a rate increase have fallen since losses on U.S. subprime mortgages caused corporate credit costs to jump, global stocks to plummet and the yen to surge.
Bloomberg

Thursday, August 30, 2007

Projections on Japan's Fiscal Liabilities

According to Bloomberg this morning the Japanese government may well have to set aside a record fraction of the budget just for debt interest payments in the next fiscal year as outstanding bond issuances rise and interest rates increase. According to Japan government officials - who spoke to Bloomberg on condition of anonymity - interest payments on government bonds and debt-redemption costs will probably surge 6 percent to a record 22.2 trillion yen ($192 billion) in the year that starts April 1. IOt is projected that this quantity alone will account for more than a quarter of total government spending.

The exact value to put on the outstanding Japanese is a matter of some controversy, but the budget assumptions it seems project that total will reach a whopping 148 percent of gross domestic product by March.

As Bloomberg note:

Total spending may expand 3 percent to 85.7 trillion yen next year as the aging population swells social-welfare costs and subsidies to local governments expand, according to the budget outlook.The ministry assumes interest rates on debt repayments average 2.9 percent next fiscal year, compared with 2.3 percent in the budget for the current period. It usually assumes higher- than-actual yields in the budget outlook.


No wonder Fukushiro Nukaga is putting pressure on the BoJ not to make any more precipitate interest rate increases.

Japan Retail Sales July 2007

Well, the Japan retail sales numbers (preliminary data) for July are now out, and sales are actually up on June, but down significantly (2.2%) year on year. The Financial Times covers the story here, and Bloomberg here.

As is becoming customary in the traditional media, bad weather is presented as the principal culprit:

The value of retail sales was 2.2 per cent lower in July than a year before – the largest drop since summer 2005. As so often, the figures were blown around by the weather, which affects consumer habits. A rainy three-day holiday weekend kept shoppers away at a crucial time.
Financial Times


Japan's retail sales fell more than twice as much as economists expected, as a tax increase and a weekend typhoon kept shoppers away from the nation's department stores and car dealerships.
Bloomberg


However a closer look at the data - which can be obtained from the charts below - reveals that this is something more than a one off, there is a trend here, and domestic consumption remains weak in Japan. Indeed the drop year on year is so significant because the July 2006 number was also low, and guess what, the weather was the problem back then. I think both investors and those interested in the future of Japan are entitled to better than this.

Basically, with consumption hugging the bottom as we are seeing, and new economics minister Hiroko Ota claiming there will be no fiscal party, and growth ex-Japan evidently slowing in the wake of the recent financial turmoil, I would be revising downwards rather than upwards my recent GDP appreciation.


First off, here's the index itself.




And here are the changes, year on year.

Wednesday, August 29, 2007

Economic Impact of the Cabinet Changes

Well it is now hardly breaking news that Abe has shuffled his cabinet. Still there are some interesting points to comment on from an economic perspective. Among the most important details are the fact that Hiroko Ota remains as Economic Minister, while former Minister of State in the Defence Agency Fukushiro Nukaga becomes Finance Minister.

Hiroko Ota has once more been quick off the mark in making her presence felt, in particular she strongly stressed that now "is not the time to increase fiscal spending". This is obviously the case, but the impact of this, if she sticks to her guns, may well be significant on Japanese GDP growth going forward, particularly on the contribution which can be made to overall growth from public investment.

Japanese Economics Minister Hiroko Ota, reappointed in a reshuffled cabinet, said on Tuesday that she opposed an increase in government spending in Japan."It is not the time to increase fiscal spending," Ota told a group of reporters, adding the government needed to continue its reforms.
Reuters


Meantime Fukushiro Nukaga has been busying himself making clear that he does not think that Japan's deflation is completely over and he that wants the central bank to carefully watch world economic and domestic data to avoid making too many mistakes. These statements, while eminently reasonable and plausible, were widely seen by financial commentators as a none too subtle attempt to caution the Japanese central bank from raising rates at the next monetary policy meeting in September.

So with a BoJ which is being urged not to be precipitate in raising rates, and an economy minister who is stressing that government spending won't be the safety net which saves the Japanese economy, can we draw the conclusion that - in intentions at least - the current priority is going to be to try and do something about Japan's huge accumulated government debt?

Sunday, August 26, 2007

Japanese GDP

I think we were all more or less on holiday here at Japan Economy Watch when the Q2 2007 GDP data came out, but Ken Worsley over at Japan Economy News did cover the release.

Scott in a comment to Claus's last post points us to a Bloomberg article which discusses a Goldman Sachs research note about whether or not a recession in Japan is now "inevitable". The good news, I suppose, is that a recession in Japan is certainly not "inevitable" - for the simple think that virtually nothing in economic affairs is inevitable - but that simple detail doesn't really get us very far, since the fact that a recession is not inevitable doesn't mean that we won't get to see one. As usual, and as with most things in life, it depends.

Let's take a look at some of the things it depends on.

First off if we look at the chart below we can see that this isn't the first time in recent quarters that the Japanese economy has appeared to slow:



In Q3 2006 the economy seemed to be slowing, only to confound the critics by accelerating again in Q4. So the question is, what are the probabilities of this happening again. Now the following chart isn't especially beautiful, but it should help us see what has been happening. What this chart shows is the share contributed by each of the key components to GDP growth in any given quarter.



As can be seen, while exports are important, they are in fact not decisive. Perhaps I should rephrase that. The situation is rather asymmetrical. Whilst it is more or less unthinkable that a Japanese expansion could continue where exports to take a serious and sustained hit, the recovery needs more than simple exports growth to maintain momentum. So, if we look at Q4 2006, which is pretty much the key recent quarter, we can see that export growth was not much more than in Q2 2007 (the bad quarter), but what made the difference in Q4v 2006 was that all the stars were in alignment, and that the ship powered ahead on all engines, including was public and private-residential investment. In Q2 2007 both of these simply went into reverse gear. Now private consumption is, as we can see, pretty flat, and not decisive, nor - given what we know about the trend in Japanese earnings (and the ageing process) - should we expect it to become decisive at any point in the foreseeable future. So the key data to watch in the coming months will be public investment (ie, what is going to happen to the fiscal deficit now that Abe is in trouble) and private residential investment. If there is no regain of momentum in the property market then it is hard to see Japan's economy regaining momentum, and in the current sup-prime panic atmosphere, it is hard to see the property sector really getting into any kind of party mood. I guess this was one of the factors they will have been bearing in mind at the Bank of Japan when they took the rate decision.

So can Japan avoid recession? Of course it can. Will it? Aha, that is a different question. To find out the answer watch this space.

Update

Japan's new economics minister Hiroko Ota is quoted today as saying she won't increase government spending. If she sticks to this then don't expect any sudden increase in public sector investment, and so don't expect any sudden and dramatic uptick in GDP over the next couple of quarters.

Japanese Economics Minister Hiroko Ota, reappointed in a reshuffled cabinet, said on Tuesday that she opposed an increase in government spending in Japan.

"It is not the time to increase fiscal spending," Ota told a group of reporters, adding the government needed to continue its reforms.

Prime Minister Shinzo Abe carried out a sweeping revamp of his cabinet on Monday after his first line-up was hit by a series of political funding scandals and gaffes that led to the ruling coalition's big defeat in an upper house election in July.

A key issue in the election defeat was a sense in rural areas that cuts in spending by the heavily indebted Japanese government had led to a growing disparity between rich urban and poorer rural areas.

Friday, August 24, 2007

Still Holding at the BOJ

Cross-Post from Alpha.Sources

At this point you could of course argue that with the current and ongoing uncertainty about the robustness of financial markets (i.e. a big black void of downside risk to just about any position) the BOJ's decision to keep rates on hold yesterday was expected. However, if we look at the way expectations of a hike have been trending steadily down in the past month it seems once again that what was a sure bet of a hike in the latter part of 2007 has now become somewhat of a bold bet. Before I move further I would like to direct the attention to my recent large note on Japan which is pretty much up to date as far as data goes and as I argued I would be very weary indeed of betting on a hike (which also did not come yesterday) as well as I emphasised how the economic fundamentals in Japan had changed thereby rendering the much illusive recovery to be fuelled by domestic demand. The only thing to add at this point in terms of graphs is the extension of the seasonally adjusted GDP series featured below which shows a stark slowdown relative to Q4 2006. Of course the correction seems set for a slight rebound in Q3 but it is readily clear at this point that we are fairing in much lower territory than has been widely predicted amongst commentators pushing the idea of a sustainable recovery.

Turning to the decision yesterday which was put down on an 8-1 vote for a hold Fukui kept the door wide open for a hike in September in line with the changed discourse at the BOJ signalling that rates could be raised even in a context of what is perceived to be a temporary last spurt of deflation here in 2007. This could seem odd in the context of what also seems to be a clear downtrend of economic fundamentals as we move into the last half of 2007 relative to what had been expected at the turn of the year. Yet, the BOJ is also, and despite what might else be going on in financial markets, under considerable external pressure to normalize interest rates from other central banks. Most notably, we are talking those central banks presiding over the currencies in the long end of the much allured Yen carry trade. Here is consequently Glenn Stevens who is central bank governor in Australia as quoted by Bloomberg ...

Reserve Bank of Australia Governor Glenn Stevens told his country's parliament on Aug. 17 that ``the sooner the Japanese interest rates are able to be normal again, the better from the point of view of the global financial system.''

Of course, the pressue levied from Australia carries no de-facto leverage towards the BOJ but we need to remember that this is all part of the big picture. In this way, the Australian cb is one of the world's central banks who is still raising rates to combat inflation (currently, the main refi rate is at 6.50%). However, as I argued recently taking up the baton from Danske Bank's chief economist Carsten Valgreen the rules of the game for monetary policy seems to have changed somewhat. The point is simply that the global search for yield epitomized by SWFs, Japanese, housewives, pension funds, and ageing serves to create a self-reinforcing process which feeds on the very wide interest differentials. For many, Japan is the epiphany here with a main refi rate of 0.5% and as soon as the BOJ would normalize excess liquidity would dry up. However, we need to remember that in this context there is a risk that raising rates in New Zealand, Australia, and yes also the Eurozone might only serve to suck in more capital thereby fuelling already brisk growth in monetary aggregates and inflation (although of course the correlation between these is debatable). In this way, we could see this process as a counterbalance to the more traditional deflationary effect which comes from higher interest rates and an appreciating currency. With the recent turmoil in financial markets the door have of course been opened for a change on this proxied by investors' risk aversion. Especially, those emerging markets which are running current account deficits and which do not possess ample FX reserves to shield themselves against a flight to quality/safety could potentially be in for a turret ride.

Ok, this was rather large de-tour around the BOJ's rate decision but this is just to say that the whole picture is not as simple as to just bully Japan into normalizing interest rates. Regarding whether we are to believe Fukui's implicit narrative that the BOJ remains bullish enough to carry through a raise in the context of deflation as well as an economic slowdown I remain very careful. Of course, the recent news pointing to how secondary inflation is picking up proxied by corporate service and input prices gives some vindication to the BOJ's main forward looking forecast. Yet, I remain cautious as to how much we can depend on traditional analysis in this case and thus how much we can expect secondary inflation to feed into core prices. Moreover, we learned recently how exports slowed considerably to the US in July which after all is still Japan's biggest foreign market. Lastly, as Ken Worsley noted recently department store sales fell back in July on a yearly basis thus pairing the rebound made in June.

In summary, I don't see a raise on the horizon anytime soon at the BOJ. Whether you buy this call is of course up to you and I have indeed been wrong before. However, remember that economic as well as price indicators are likely to point against a hike in the months to come which leave the BOJ's inbuilt propensity to raise on the expectation of future sunshine as the crucial parameter to gauge in order to asses the likelihood of a future rate hike in 2007.