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Thursday, January 31, 2008

Japan Wages and Housing Starts December 2007

Well the storm clouds really seem to be gathering over Japan at the moment, and as I commented to Claus this morning, it seems that Japan could now enter quite a protracted recession. No one is expecting this I feel.

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.


Update


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.

Tuesday, January 29, 2008

Japan Unemployment December 2007

Japan's job vacancies fell to a two- year low and the jobless rate was unchanged, adding to evidence that consumer spending may slow. The jobless rate remained at 3.8percent in December, the statistics bureau said today in Tokyo. The number of positions available for each applicant slipped to 0.98.

Job seekers outnumbered positions available last month for a second consecutive month, with the ratio falling to the lowest level since October 2005, the Labor Ministry's report showed. The ratio of jobs to applicants slipped to 1.04 in whole year 2007 from 1.06 in 2006.

In fact the number of unemployed persons in December 2007 was 2.31 million, which was a decrease of 130 thousand or 5.3% from December 2006, while the number of employed persons stood at in December 2007 63.96 million, an increase of 420 thousand or 0.7% on the previous year.



The average unemployment rate for whole year 2007 was 3.9% which was down from the 2006 average of 4.1. The average number of employed persons rose from 63.8 million in 2006 to 64.1 million in 2007.




The statistics office also published earnings and expendidture data for December 2007. Expenditure data for two-or-more-person households showed that average monthly consumption expenditures per household for December 2007 were 351,667 yen, which was up 3.1% in nominal terms and 2.2% in real terms over December 2006.

The income and expenditure data for workers' households showed that average monthly income per household stood at 950,654 yen, which was down 1.8% in nominal terms and 2.7% inreal terms on December 2006.



Consumption expenditure stood at 379,388 yen, up 2.7% in nominal terms and 1.8% in real terms on the previous year. If people are spending slightly more and earning slightly less, then the conclusion is inescapable, they are saving less.



In a separate report we learn that retail sales fell for the first time in five years in 2007, as consumers bought fewer cars and unfavorable weather affected purchases of seasonal items, at least that was the explanation offered by Trade Ministry spokesman Takahide Arai earlier today. The change - reported by METI - was an increase of 0.2% year on year in December 2007.

Friday, January 25, 2008

Japan CPI December 2007

According to the Japanese Statistics Office this morning consumer prices in Japan rose in December at an annual rate of 0.8 per cent according the so called "general index", double November’s pace, as higher oil prices pushed up the index up another time. As David Pilling in the Financial Times:

The faster-than-expected inflation rate is causing a dilemma for the Bank of Japan, which is coming under pressure to lower rates at a time when some board members are increasingly concerned at the public’s inflationary expectations.

Toshihiko Fukui, BoJ governor, trod a fine line in parliamentary testimony Friday, conceding that growth in the year ending March 31 would be in the “low 1 per cent range” against the bank’s previously forecast 1.8 per cent, yet insisting that a virtuous growth cycle remained in tact.

Mr Fukui rejected the premise of questions from Kozo Yamamoto, a long-time foe of the bank in the lower house, who called for the central bank to cut rates from 0.5 per cent immediately to stave off recession.


Actually, beyond the confines of the political arena the dilemma may not be as acute as it seems, since the core-core inflation (ie if we strip out food and energy) is still in negative territory (-0.1% y-o-y) and there is no real sign of any sort of sharp uptick in prices if we look at the chart below.




Also, since most of the leading international economic organisations are forecasting a slowdown in global growth this year, it would seem to be unlikely that oil prices are going to rise much further in the near future (and that is what inflation is about, surely, that prices rise, not that they are simply high), and indeed the possibility that they may slip back somewhat will have to be carefully evaluated and taken into account by the bank.


As Fukui said: “Even if a sense of crisis grows, we will calmly examine conditions and make appropriate monetary policy decisions......We will steer monetary policy based on our belief that Japan can continue to post growth in a stable manner by keeping the current accommodative conditions.”

This phrase was interpreted by many as signalling that although the bank was in no hurry to raise rates, the next move was likely to be up rather than down, but this could equally be seen the other way, since if the economy continues to move on its present downward path, and we don't see another spike in either oil or food, then the present conditions will turn from accommodative to restrictive, and what you could read Fukui as saying is that under those circumstances the bank will act accordingly.


Equally Hiroko Ota, economy minister, is well aware that in many ways energy-related inflation is not good news. “Higher crude oil prices cause Japan nothing good,” she said, adding: “They have a negative impact on consumption as the prices of goods necessary for people’s daily lives have risen while wage increases have been subdued.”


Also the Bank of Japan acknowledged earlier in the week that growth was slowing faster than expected, although they stopped short of abandoning their central scenario that Japan was still on a sustainable growth cycle.

The Bank's Bi-annual “Outlook for Economic Activity and Prices” report is the central tool for signaling mid-term BoJ intentions to markets. In October it predicted that the economy would grow 1.8 per cent in the year to March 2008, higher than the 1.3 per cent forecast by the cabinet office. While the BoJ last Tuesday implied that 1.8 per cent would now be difficult to achieve, for some reason or another they refrained from offering a new number, a stance that many observers found surprising.


The Bank stood by the view that it expected a rebound in the fiscal year to March 2009, for which in October it predicted 2.1 per cent growth, saying: “With a virtuous circle of growth in production, income and spending remaining basically intact, in fiscal 2008 the rate of real GDP is likely to be broadly as projected and slightly higher than the potential growth rate.”

Clearly whether or not this virtuous circle exists when you come to look at the way in which income and spending have failed to move in line with increases in production and reductions in unemployment, but quite possible this bullet will come to be bitten when we move on to the post Fukui era. For now what we may have is a nice old fashioned compromise, where everyone's face is saved, at least in public.

Thursday, January 24, 2008

Japan Exports and Trade Surplus December 2007

Japan's export growth slowed for the second consecutive month in December as a decline in U.S. demand reduced sales of items like cars and electronics in what is still the country's largest overseas market. Exports, which were the key factor responsible for almost all of Japan's third-quarter GDP growth, rose 6.9 percent from a year earlier, after climbing 9.7 percent in November, according to data released by the Finance Ministry in Tokyo earlier today.



As demand for Japanese products weakens in the United States exports to the EU and China have steadily been picking up some of the slack - as explained at greater length in this post - and exports to China, Japan's second-largest export market, rose 8.4 percent in December. Exports to the EU - at 1.09 trillion yen - were also up slightly on November, but still below the October high of 1.14 trillion yen.






Today's numbers suggest that what are still record exports to Asia may fail to make up for slowing shipments to the U.S. since a steeper U.S. slowdown could also stifle demand in Asia, and particularly in China, where the risks of a slowdown as the year advances do seem to be growing. Imports rose 12.1 percent in December to a record, causing the trade surplus to narrow to 877.9 billion yen ($8.2 billion).



Instability in financial markets and growing volatility in the carry trade are also producing a rise in the value of the yen, making the outlook for exporters even more gloomy. The yen has gained 5 percent against the dollar over the last year, and has also been rising against the euro of late. The yen traded at 106.44 per dollar at 12:00 p.m. in Tokyo from 106.67 before the report was released.

Half of Japan's shipments overseas are settled in U.S. dollars even though the country is increasingly coming to rely more on the EU and China and other emerging markets for trade.

The yen is fast approaching the point at which companies say they won't be profitable, with a value of 105 yen to the dollar being seen more or less as a break point. Japan's currency is already 8 percent above the level on which Japan's largest exporters calculated their profit forecasts for the year ending March 2008.

China, including Hong Kong, overtook the U.S. as Japan's largest export market in 2007, today's report showed. Exports to the two markets rose to 17.4 trillion yen. Shipments to the U.S. fell slighly - for the first time in four years - to 16.904 trillion yen, down from 16.933 trillion yen in 2006 . Excluding Hong Kong, exports to China totaled 12.8 trillion yen, meaning the U.S. is still Japan's single biggest market.




Friday, January 18, 2008

Japan Consumer Confidence Index December 2007

Japan's consumer confidence dropped to its lowest level in more than four years in December as a combination of falling wages and rising prices continued to squeeze households. The sentiment index slid to 38 last month from 39.8 in November, the Cabinet Office said today in Tokyo. There isn't that much more to say about this at the present time, since it is unfortunately now all too predicatble. Confidence among consumers hasn't been this low since June 2003, when unemployment was close to a postwar high, so the novelty here is the unemployment is pretty low, but still people are being squeezed. This merits a lot more thought beiong given to the why and the wherefore.




All the components in the index are down, and at the same time we also learned to day from Monthly Labour Survey conducted by the Japanese labour ministry that wages nonly showed an annual gain of 0.1 percent in November and this was only the second monthly increase in the 11 months of 2007 for which we now have data.

Wednesday, January 16, 2008

Japan Machinery Orders Fall in November 2007

Japan's machinery orders fell last November as companies seem to have cut back on spending in anticipation the U.S. slowdown will spread to Europe and Asia and hurt Japanese exports. Orders fell 2.8 percent from October, a month in which they rose 12.7 percent, the Cabinet Office said in Tokyo today.




The Topix stock index also fell 3.5 percent today, following an unexpected drop in U.S. retail sales announced yesterday. The yen also keeps on pushing upwards at the moment, rising to 106.05 per dollar at the close in Tokyo this afternoon, after touching 105.97, the strongest since May 2005 earlier in the day.

In seperate news it was announced that Japanese producer prices rose 2.6 percent in December from December 2006, the fastest pace since September 2006. Higher oil and raw-materials costs are thus squeezing profit margins at just the time when both internal and external demand are slackening off.



A Bank of Japan survey out today also showed that consumers last quarter became the most pessimistic they have been about the economy since March 2003. And 86 percent of respondents predicted prices will rise this year, the highest proportion since the central bank started asking people about inflation expectations in 1997. Some 54.5 percent of the survey's respondents said they plan to cut back on spending this year. About 40 percent said they expect wages to fall this year, compared with 38.9 percent in the previous survey. Meantime Bank of Japan Governor Toshihiko Fukui said yesterday that Japan's growth will keep slowing "for the time being" reinforcing speculation policy makers may lower interest rates at some point in the not too distant future.

Friday, January 11, 2008

Economy Watchers Index December 2007

This post is more to keep the data set up to date than to register any real sense of surprise about the fact that Japanese merchant sentiment fell to a five-year low in Decemebr, as stagnant wages and record petrol prices left consumers with less cash to spend at restaurants and shops. Unfortunately, as I said yesterday, this is now becoming - at least in the short term - all too predictable. Surprises - if there are any to come - will probably start to arrive after we enter the recession.

The Economy Watchers index, a survey of barbers, shopkeepers and others who deal with consumers, slid for a ninth month to 36.6 in December from 38.8 in the previous month, the Cabinet Office said today in Tokyo, the lowest since January 2003. A number less than 50 means pessimists outnumber optimists.



Merchants' views on prospects for business over the next two to three months also deteriorated. The outlook index slid to 37.0 last month from 38.8, a five-year low.

Thursday, January 10, 2008

Japan Leading Indicator November 2007

Japan's broadest indicator of future economic activity was down again this month, the fourth cosnecutive weak showing, suggesting that the what has been the longest expansion in more than 60 years may well now be coming to an end. The leading index was at 10.0 percent in November, the Cabinet Office said today in Tokyo. A reading of below 50 signals slower growth in the next three to six months.



Weak domestic demand and consumer consumption as Japan's population and workforce steadily age leave the economy increasingly dependant on export growth and overseas demand. To date the slowdown in US demand has been comensated by growth in Europe and China, but now there are clear signs the Chinese authorities really will have to throw the brake on growth this year as iflation gets steadily out of control, while the slowdown in Europe is now gathering speed more rapidly than the one in the United States. Goldman Sachs Group today cut its estimate for Japanese growth in 2008 arguing that slower export demand has put the risk of a recession in Japan at a "danger level". Goldman cut their growth forecast to 1 percent from 1.2 percent and said the Bank of Japan will have to forego any interest rate increases until next year. I would go further. I would say that a recession in Japan is now a foregone conclusion. The only real question is how deep and for how long. 1% growth may well be on the optimistic side, and I would start out at 0.5% and subject to downward revision. On the BoJ, as Claus says, it isn't so much that they won't raise as when are they likely to cut, and when will we be back (yes, that dreaded word) to ZIRP.

Japan has had three recessions since the country's stock and property bubble burst in the early 1990s. The first lasted 32 months from March 1991 to October 1993, while the second dragged on for 20 months from June 1997 to January 1999. The most recent recession was in the 14 months from December 2000, following the bursting of an information-technology boom. So all the indiactions are that this recession will not be a short affair. It needs to be borne in mind that each time round now Japan's population is older, and the fragility of the underlying situation proportionately greater.

As Claus was indicating in his recent post, there is probably now going to be a certain monotony in the data here, as it all moves - sometimes more slowly and sometimes more quickly - in the same direction. The centre of action is now likely to move to the political stage and to following how the Japanese population react to yet another disappointment.

``We project weaker-than-expected growth in the first half of 2008 owing to an inevitable, moderate slowdown among emerging economies,'' said Tetsufumi Yamakawa, chief Japan economist at Goldman Sachs in Tokyo.

Thursday, January 03, 2008

Talking Japan

I am sure most of our readers are already familiar with the other big Japan watching site out there run by Ken Worsley and its timely analysis of the economic and political situation in Japan. Now Ken, alongside co-host Albrecht Stahmer, has also decided (the podcast has been running since March 2007 actually) to bring the Japan economic/business news and commentary to the podcasting media over at Transpacificradio.com under the seal of Bizcast Japan. Over the course of 2007 ten editions have been published and in their latest bumper installment Ken and Albrecht look forward to the issues within the realm of Japanese economics, business and society which are likely to rear their heads in 2008. Here is their written intro ...

It’s the end of the year, and nothing could sum up Japan’s biggest business stories of 2007 better than sorting them into a top ten list - except for sorting them into a top seven list and discussing them here on BizCast.

Along with a few honorable mentions, co-hosts Albrecht Stahmer and Ken Worsley discuss Krispy Kreme, Nintendo’s domination of the video game market, Burger King, Fast Retailing’s failed bid for Barney’s, the collapse in housing starts, WiMax, Toyota outselling General Motors in the first quarter of 2007, Japan’s demographic crunch, bad fiscal policy, Nova’s bankruptcy, corporate governance, scandals in the food industry, Steel Partners, J-SOX, the widening gap between income in urban and rural Japan, the Mega Mac, Triangular Mergers, the increase in land prices, Sony’s new war chest, and Scott Callon’s shareholder revolt.

Which made the top 7 of ‘07? You’ll have to listen to find out. This special double release clocks in just under 70 minutes.

Alby and Ken would like to express many thanks to everyone who has listened to the first ten episodes of BizCast Japan this year. We’ll be back again in January, and we’re sure the business news will stay just as exciting to follow, analyze and discuss.

The podcast(s) is (are) well worth a listen and I encourage our readers to tug this one firmly into their RSS readers for further reference as we move forward in 2008, I know that I will.