Today we learned, if anything, that Japan is indeed balancing on the knife's edge of a recession. With the leading economic index clocking in a score of 50 which is right in the bulls eye between expansion (>50) and contraction (<50). For more on the cyclical assessment I am referring to my most recent write up here as well as the numerous analytical posts Edward has made in the context of concrete data releases.
As such, today's most important release on Japan is without a doubt OECD's 2008 Survey of the Japanese economy and society. For most of you I guess that the whole publication won't be available but from the chapter-wise summaries you should be able to get a good picture. In many ways, the OECD's recommendations and calls for action are very much standard stuff. However, there was specifically one thing which caught my eye as I read it in Bloomberg's small review of the publication.
Japan's central bank should avoid raising interest rates until inflation is ``firmly positive,'' the Organization for Economic Cooperation and Development said. ``Further hikes would not be warranted until inflation is firmly positive and the risk of renewed deflation is negligible, hence avoiding the risk of derailing the expansion,'' the OECD said in its report on Japan's economy released today.
I think this is rather important since it highlights the need, as we also here at JEW have been relentlessly arguing, to treat the current inflation dynamics in Japan with care in connection to the application of standard economic theories. Japan is still formally in deflation if you strip out energy and food and the fact that this price gauge has not risen in the last decade is not to be taken lightly. Moreover, Japan also suffers from asset price deflation (or very close to it) in key pockets of the economy something which all those reports on downtown Tokyo real estate tend to neatly bypass. As a backdrop of this the OECD recommendation to hold off raising interest rates until inflation lingers may prove to be somewhat of an eternal waiting game. The OECD also spends a large part of its ammunition to discuss Japan's appalling fiscal profile and its public debt. Coupled with a relentless process of ageing this is by far the most serious challenge for Japan. The OECD thus moves into the proverbial mindfield by suggesting that Japan not only curbs public spending but also widens the revenue base by instigating those much debating consumption taxes. The immediate impetus for these suggestions are straight forward. Simple extrapolation of Japan's y-o-y fiscal position as well as its monumental debt to GDP ratio of 180% point to a wholly unsustainable outcome if action is not taken. However, such measures will not come without costs. As we have persistently been showing here at this space the endemic nature of Japan's consumption and the subsequent reliance on exports to grow cannot be detached from the demographic realities. In this way, there is a risk that Japan's current growth path would be even further solidified by raising revenue from an already beaten down consumers. However, where to raise those revenues then? This is indeed the vexing question; given the fact that growth is now coming mainly from exports and income earned from foreign assets it would perhaps be wise to also look here to balance the effect from raising revenues. However, I also realize that this will be difficult to square in absolute terms since the revenue base from taxing consumption is much higher and therefore may be difficult to avoid. Precedence for this can be seen in Germany where indirect taxes in the form of VAT were raised recently.
Yet, I won't rant at the OECD here since I do think that they manage to pinpoint the main issues. One thing however that I would like to see is simply more focus on the problem at hand with respect to the chaning demographics of Japan. As such it is not that OECD is not aware of the issue itself; not at all. But I would like to see much more explicit focus on how to raise fertility because at the end of the day, and even though the effect won't be seen for the next generations, this is ultimately what is needed in Japan's current situation now that we are talking about long term structural tendencies.
Japan Real Time Charts and Data
Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Japan related comment. He also maintains a collection of constantly updated Japan data charts with short updates on a Storify dedicated page Is Japan Once More Back in Deflation?
