Bloomberg quote the official BoJ view from central bank policy maker Kiyohiko Nishimura that the cycle of profits feeding into wages and spending by Japan's consumers remains intact and the central bank expects the economy to extend its expansion, but this is looking more and more unrealistic with every passing day.
It is important to keep in mind that 10 more years have now elapsed since the last time Japan fell off into serious recession in1998, and the Japanese population is now somewhat older. If ageing population has a significant impact on economic performance, then we should expect to see this dircetly reflected in the depth and duration of the recessions. The clock is ticking away, and unfortunately it isn't going to stop.
One indication of this is that the wages received by Japan's steadily ageing workforce fell at the fastest pace in more than three years in December, as bonuses fell sharply, making the view that consumers will help the economy overcome slowing overseas demand increasingly an untenable one. According to the latest monthly labour survey the Labor Ministry monthly wages, including overtime pay and bonuses, dropped 1.9 percent from a year earlier.
Bonuses fell 3.6 percent, the biggest drag on paychecks last month, today's report showed. Most employees get a winter bonus in November or December that typically amounts to 10 percent of annual income. Average wages fell 0.7 percent to 330,212 yen ($3,090) in 2007, the biggest drop in three years. Salaries are about 11 percent lower than they were a decade ago. The number of part-time workers increased 4 percent last year, suggesting that companies are trying to cut costs by hiring cheaper labor.
In a separate report today from the Japanese Land Ministry we learn that Japan's housing starts fell for a sixth month in December. Certainly those famous "stricter rules" for obtaining building permits are playing a part here, but I think at this point it is not unreasonable to surmise that more factors are now at work. Ground broken on new homes and condominiums slid 19.2 percent from a year earlier after falling 27 percent in November according to the Land Ministry data.
Also housing starts fell 17.8 percent in 2007, the first annual decline in five years and the biggest since 1991. Ground was broken on only 1.061 million units, the fewest since 1967.
The government introduced the stricter building-permit rules on June 20, after an architect fabricated earthquake- resistance data in 2005. The change produced a logjam in building applications and caused a drop in housing investment that wiped more than 1 percentage point from the economy's 1.5 percent annualized growth in the third quarter.
The pace of the decline in housing starts has eased since September, and the Land Ministry relaxed the regulations in November, following builders' complaints that they didn't have time to adapt to the requirements of the new system.
The government upgraded its evaluation of home building in its monthly economic report for January, saying the construction slump is showing signs of abating. On an annualized basis, builders broke ground on 1.05 million new homes and condominiums in December, today's report showed. The figure has risen since September, which was the lowest since the government began keeping records in 1965. Construction orders rose 4.7 percent in December from a year earlier, the ministry said, the first increase since June. So, the worst of the permits induced decline may well be over, but we are a long way from seeing a real resurgence in activity. At present the rate of deceleration is simply slowing, which is good news, but not quite the same thing as a real rebound.
So a very wide variety of reports this month appear to show that the Japanese economy is losing steam. Industrial production rose less than economists estimated in December, jobs available to applicants fell to a two-year low and consumer confidence slid to the lowest level since 2003. If we add in todays wages and construction data all eyes must now be on the Q4 2007 GDP number. Bloomberg surveyed economists suggest it slowed to an annual 0.9 percent pace. My feeling is that it could come in even lower. Now let's wait and see.
Scott has asked about Japanese savings rates in comments.
As the proportion of retirement age Japanese gets larger, at some point these folks are going to need to start using their savings to pay for living expenses. Do you have any data that shows this taking place? You mentioned in a different post that Japan now has 10% of its population age 75 or over. Surely these people must be living on savings and whatever government or private pension money is available to them.
Now population ageing and saving is a pretty complex topic, and some of the data are either contradictory or hard at this point to interpret. But there is little doubt the aggregate saving rate is falling in Japan . Here is a chart which shows the general tendency.
One of the problems which arises in assessing Japanese savings is that there are two main measures of the savings used. One savings rate — the macroeconomic savings rate for the nationwide household sector, as compiled in the national accounts by the Cabinet Office — stood, for example, at only 3,2 percent in 2004 (the latest data point in the time series I have, which is provided by Eurostat but comes from the Japan Cabinet Office).
On the other hand on a household basis, the most widely used statistical indicator used for measuring saving is the workers’ households data contained in the Family Income and Expenditure Survey (published by the Ministry of Public Management, Home Affairs, Posts and Telecommunications). The reading given on this latter measure is well above the aggregate Cabinet Office one, and the apparent contradiction between these two indicators does call for some sort of explanation. While the direct cause is probably attributable to differences in the concept and scope of disposable income and savings used in each case, it is also possible to identify both a change in the composition and behavioural patterns of saving.
The first point to have clearly in mind is the distinction between working and non working households.
As we know Japan’s population is aging at an accelerating pace. In 2000, the 65-and-over age group comprised 17.3 percent of the population, up from 12 percent in 1990. This represents an increase of 5.3 percentage- points in the 1990s, compared to the more modest increases of 3.0 percentage-points in the 1980s and 2.0 percentage-points in the 1970s.
Such accelerated aging might be expected to be accompanied by a decline in the savings rate. But in Japan’s case, what we can see is that the savings rate among workers’ households has been increasing in recent years, rising from 22.1 percent in 1980, to 24.7 percent in 1990, and 27.9 percent in 2000. But at the same time, as Japanese society has aged the proportion of non-working households — which consists primarily of retired households — has risen steadily, from 6.3 percent in 1980 to 12.6 percent in 1990 and 20.3 percent in 2000. Thus there is a compositional shift in saving.
Most households under 60 still have working members, and the savings trend over the past two decades is fairly straightforward and not difficult to internpret. However, for households aged 60 and over, the savings trend is complicated by the fact that over half (56.2 percent) of them have become non-working households with a savings rate of -16.2 percent, which compares with a savings rate of 18.4 percent for their working counterparts in the same age group.
A second factor is age related saving among working households (the behavioural element). Over time, and among working households the savings rate tends to rise in each age group, and the savings rate pattern by age is fairly stable over time. This indicates the presence of life patterns which conform to some extent with the life cycle hypothesis — high incomes earned during the working years are not completely consumed, but rather saved for future consumption during retirement when incomes are low.
However, minor changes can be identified between age groups. Savings rates in the late 1980s were highest in the following age group order: 40s, 30s, 50s, and 20s; in the late 1990s, this order had changed to: 30s, 40s, 20s, and 50s. This is because the savings rates of the 20s and 30s age groups increased by more than that of the 40s and 50s age groups. This position is only to be expected as life expectancy increases and uncertainty associated with pension payments also rises. The young feel an increasing need to provide in some way or another for their futures.
OK, this is, as you can see, a complext topic but I hope this brief note has been helpful. The issue of Japanese saving has produced a long and very voluminous literature, but a very useful introduction to the whole topic can be found in the paper "The Household Savings Rate Paradox - The Population is Aging, but Workers' Households are Saving More" by Tatsuya Ishikawa and Yasuhide Yajima, Economic Research Group, NLI Reserach Institute, 2007.