Basically, most of the things that are happening at the moment are pretty foreseeable: the carry trade is unwinding, and the yen is shooting through the roof. At the same time, Japans export dependent economy is folding-in on itself. So over the coming months we will get to see the full real economy impact of all the financial carnage we have all been so fascinated by.
Basically, when the dust settles, two fundamental questions will remain: why Japanese interest rates are forced to remain so congenitally low? And why Japan's economy is so export dependent and hence vulnerable to any sudden short sharp shock in the global economy? Despite having relatively little exposure to a domestic housing boom Japan's financial sector is struggling, and my guess is that we are about to see a repeat performance of 1998, and possibly worse. In particular, with the debt-to-GDP ration currently running at around 182% (OECD 2008 estimate) Japan has very little room for any kind of fiscal stimulus, and it is very hard to see where they can find the money for the bank bailouts it seems they are going to need.
My own personal prediction is that when this whole current flap settles down then "the eyes of Sauron" are most definitely going to settle on developed economy sovereigns, and especially in those cases where fertility is the lowest (over the most extended periods of time) and where the pace of population ageing the highest, since it is in precisely those countries that the pressure on debt will be the greatest (the hammering that Eastern Europe is taking at the moment gives us a foretaste, in my view). In this sense the problem was always coming, and the bank bailouts only constitute a little extra icing on the cake.
Retail Sales Down
Now for the little snippet of news that constitutes the pre-text (or should that be post-text) which gave me the excuse to say what I have just said. Japan's retail sales dropped for the first time in 14 months in September. Sales were down 0.4 percent from a year earlier, the first decline since July 2007, after rising 0.7 percent in August, according to data from the Trade Ministry in Tokyo today.
Actually the above chart really doesn't tell us that much, since this data is not inflation adjusted, so, for example, the spike in July and August is partly a reflection of the spike in oil prices around that time. For some reason METI do not publish a seasonally and price adjusted index so we could really see what was happening. But still, it is pretty evident that Japanese retail sales are fast losing what little steam they had at this point.
