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Monday, June 30, 2008

"Good" and "Bad" Inflation in Japan

Well, one good turn deserves another. Claus and I are currently doing a spell of guest posting on the RGE Europe EconoMonitor at the moment (here, and here, for example), and true "just in time" fashion RGE Analyst Mary Stokes has a piece today about Japan's inflation issue.


Inflation is rearing its ugly head around the world, keeping many central bankers awake at night. In Japan, by contrast, it has received an almost enthusiastic reception. Many see the 1.3% yoy rise in Japan’s overall CPI in May – the eighth straight rise and a 10-year high - as a sign the economy has finally emerged from a decade of debilitating deflation.

But perhaps it’s not time to break out the champagne just yet. Below are some thoughts on the potentially good, bad, and ugly sides of Japanese inflation......

Looking more closely at Japan’s rise in consumer prices, it becomes clear that inflation has been driven by food and energy price hikes. When these items are stripped out, it’s much less clear that Japan has really shaken off deflation..

The potentially ugly side of Japanese inflation is that instead of boosting consumer spending, it could actually drag down growth. Imported inflation, via food and energy price hikes, may very well be suppressing domestic demand. The problem is that wage growth is accelerating only enough to offset inflation, as a report from Mizuho Corporate Bank points out. Official data show nominal wages growing an average 1.3% yoy for the first four months of 2008. This means wages were basically flat in real terms. So while inflation expectations may be shifting higher, as shown in some recent surveys, most consumers don’t have any more money in their pockets to spend. Nominal household spending actually fell in March, April, and May. In fact, spending by Japanese households in May slid 3.2% yoy, the sharpest fall in 20 months.

So where do you fall (no pun intended) on Japanese inflation – is it good, bad, or just plain ugly?

Friday, June 27, 2008

Japan Consumer Prices, Household Spending and Industrial Output May 2008

Japan's household spending fell in May, job vacancies dropped to a three-year low, the inflation rate almost doubled and the government downgraded its assessment of industrial production despite a report issued today, which showed output rose 2.9 per cent in May from April, the first increase in three months. As might be imagined opinions are now pretty divided about what happens next in Japan, with Bloomberg headlining "Japan Spending, Inflation Data Fuel Recession Concern" and the Financial Times inform us that "Solid data show Japan staving off recession". So which is it? Perhaps we need to wait and see what Claus has to say on the matter.

Consumer Prices


Japan's annual consumer inflation accelerated again in May, with the general index hitting a new decade-high of an annual 1.3% on surging energy and food prices and adding to the Bank of Japan's headaches over how to react to the pressire of rising costs that are now evidently begining to hurt the economy.

The core consumer price index (CCPI), which excludes volatile fresh food prices but not other food products or oil prices, rose 1.5 percent from the same month last year, above a consensus market forecast for a 1.4 percent rise. Japanese consumer inflation has have been rising gradually this year, largely due to spikes in prices of food and oil, after hovering below the zero line for most of 2007.



Japan has been suffering from some kind of deflationary pressure or another for more than a decade now, but the return of inflation has not been seen as especially welcome as it is being driven entirely by rising import costs rather than pressures from a stronger domestic economy.


The fear is that with this cost push inflation the higher costs of commodities such as crude oil, steel and grains will cut into company profits and consumer spending and hence slow the domestic economy.

And meanwhile the so called "core-core" CPI - ie excluding energy and food - remains in deflationary territory, being down 0.1 percent year on year in May. Food prices jumped 2.4 percent from a year earlier.

"The rise in the price index is not favourable at all as it was not caused by increasing demand," said Hiroko Ota, minister for economic and fiscal policy. "The higher material costs, as well as higher oil prices, are undermining corporate performance and consumer sentiment".


Household Spending

Consumer spending fell in May as higher prices for basics and the prospect of lower summer bonuses hit household budgets. The Ministry of Internal Affairs and Communications reported that average household spending fell a real 3.2 per cent in May from a year earlier, with the average monthly income of households down by 0.6 per cent. This was the third straight month of decline, and it was a sharper drop than the 2.7 percent annual decline in April.

Household spending by salaried workers fell by 0.9 percent on year in May, while the propensity for households to consume was 93.1 percent - down 1.0 point.




Unemployment


The jobs-to-applicants ratio fell to 0.92 in May, meaning 92 jobs were available per 100 applicants, down from 0.93 in April but matching the market consensus, while the unemployment rate stayed at 4 percent in May. Japan's seasonally adjusted unemployment rate stood at 4.0 percent in May, unchanged from the previous month, but up by 0.2% on May 2007.



The number of jobless people totaled 2.70 million, up 120,000 from a year earlier, the largest growth since 130,000 recorded in January 2003, the Ministry of Internal Affairs and Communications said their preliminary report.

It was the second straight month of growth following the 70,000 April. The ministry left unchanged its basic assessment that a recovery in Japan's employment "has stalled." The Ministry spokesman also indicated that the assessment "has been slightly skewed downwards."

He pointed out that the number of women who have stopped job searches increased in May and that the number of elderly who involuntarily left their jobs also rose in the reporting month.

A separate report from the Ministry of Health, Labor and Welfare said the ratio of job offers to job seekers in May was at a seasonally adjusted 0.92, down from 0.93 in April for the fourth straight monthly drop. That means there were 92 jobs available for every 100 job seekers. According to the labor ministry, the number of job offers grew 1.7 percent in May from the previous month and that of job seekers climbed 2.3 percent. The number of new job offers fell 15.6 percent from a year earlier. It is also likely that the deteriorating confidence among companies amid slumping exports and a profit squeeze from high raw material prices will curb firms' demand for labor.

Japan is also now no longer generating extra employment, with the number of jobholders sinking 210,000 from a year earlier to 64.78 million, thus registering the largest decline since 370,000 in June 2004. It was also the fourth straight monthly drop.

The number of male jobholders totaled 37.75 million, down 150,000 from a year earlier, while the number of female workers was down 50,000 to 27.04 million. The number of people who voluntarily quit their jobs was up 50,000 on May 2007 - and reached 950,000 - while people who were laid off totaled 640,000, up 60,000.

By industry, the number of jobholders continued to fall in the construction sector, while employment in the medical and welfare sector rose. By company size, the number of employees shrank in firms with less than 500 workers compared with a year earlier, but rose in enterprises with 500 or more staff. The results underline the gap in business confidence between small and large firms.


Industrial Output

Industrial production, considered by many economists to be the single best indicator of economic activity, rose 2.9 per cent in May, slightly better than expected, after a 0.2 per cent contraction in April. This was the first increase in three months. The government downgraded its assessment of industrial production for the first time since December stating that output is showing signs of weakness because of higher energy costs and weakening global demand.






The Ministry indicated the change in its assessment by adding the words "a weak note" to the statement, and this weakness reflects sluggish demand for Japanese products in North America and Europe on the back of slowing economies in the regions and rising raw material costs according to the Ministry.




The ministry went remained on a bearish footing depite the headline figure of 2.9 percent gorwth in May, since even this fell far short of the 4.7 percent increase it had projected. The ministry is now projecting a fall of 0.4 percent in output from manufacturers for the April-June period. If this prognosis is fulfilled Japan's manufacturing output will experience the second straight quarterly shrinkage for the first time since the April-June 2001 quarter. In tandem with the decline in household spending a weakening exports this could suggest that GDP may have contracted in Q2 2008.

Compared with April, production in the transport equipment segment, the biggest contributor to the overall output gain in the reporting month, jumped 9.3 percent and that in the information equipment sector surged 10.2 percent, led by robust sales of mobile phones and car navigation systems.

The ministry said output from manufacturers is expected to decrease 0.9 percent in June but gain 2.2 percent in July. The June slump is due chiefly to projections of declining output in the automotive, general machinery and electrical machinery sectors. The transport equipment sector is forecasting an output loss of 4.0 percent in June. But it is expected to increase 2.8 percent in July.

Conclusion

It is hard to avoid the conclusion that for once Bloomberg may be a bit nearer the point here than the Financial Times is, since while it is too early to talk of recession in Japan yet, there are evident signs of weakening everywhere, despite the seemingly impressive headline industrial output numbers.

Wednesday, June 11, 2008

Japan Machinery Orders, Leading Indicator, Economy Watchers April 2008

Japanese machine orders rose in April after falling for two consecutive months, however Economic and Fiscal Policy Minister Hiroko Ota stressed that demand for machinery still remains weak. Machinery orders, which give an indication of likely capital spending in the coming three to six months, were up by 5.5 percent in April after declining 8.3 percent in March and 12.3 percent in February, according Japan's Cabinet Office.





Still, business investment continues to hold up even while declining, and the rate of decline in the first quarter was less than half the rate seen during the Japan's three most recent recessions. While capital spending fell for a fourth consecutive quarter in the three months ended March, the average rate of decrease in each quarter was less than 5 percent, compared with more than 10 percent in the three downturns since 1990.

The flipside of this, evidently, is that exports have continued to perform better than expected in the face of the US downturn and are even doing so now when confronted by an additional slowdown in Europe. The reason for this is relatively straightforward: continuing demand driven by vigorous growth in some emerging economies.

In addition, inside Japan itself companies remain under pressure to upgrade equipment after postponing purchases, in some cases for many years. More than half of Japanese businesses said the main reason for capital investment during the last fiscal year was to replace equipment, according to a government survey released in March.


Q1 2008 GDP Revision

At the same time Japan's first-quarter economic growth was faster than initially estimated according to figures released today which show that businesses spent more on capital equipment than previously estimated, while government spending fell rather less than initially estimated. Japan's gross domestic product expanded year on year by 4 percent in the three months which ended March 31, up from the 3.3 percent estimated last month according to revised data from the Cabinet Office.

Japan expanded 1 percent from the fourth quarter, today's figures showed, more than the 0.8 percent reported last month. Business spending increased 0.2 percent, compared with a 0.9 percent decline initially estimated, reflecting figures published by the Finance Ministry last week that showed companies increased capital spending by 1.3 percent in the quarter, and this data alone accounts for about 60 percent of the business investment component of revised GDP.

The rate of expansion of both exports and imports was also revised down, exports from a quarter on quarter growth of 4.5% to 4% and imports from 2% to 1.4%.







Leading Index

Japan's leading index tends to confirm the recent capex and machinery orders data, and suggests that the Japanese economy may continue to avoid recession during the next three months. The leading index, which is a composite of 12 indiactors including housing starts and stock prices, rose to 92.8 percent in April from a revised 90.8 percent the March, according to the latest release from the Cabinet Office. The increase suggests that far from slowing down growth may even accelerate slightly in the coming quarter.

The index is partly helped by the fact that Japan's housing starts have been recovering after plunging to a four-decade low last year because of a permit logjam which was produced by new government regulations introduced to stop building fraud. The government relaxed the rules in November and housing investment rose for the first time since 2006 in the first quarter of 2008.

Real wages also rose in April for a fourth month, the longest positive sequence in almost two years. Also the hiring of full-time workers has been accelerating since October as companies added permanent staff to comply with new labor regulations. Employers hired full-time staff at twice the pace of part-time workers in April. So basically consumer demand has been more positive of late in Japan, and while we are a far cry from seeing a consumption driven expansion, the year on year increase of 3.3% which was achieved in the first quarter is hardly to be sniffed at.




So Japan may well extend its longest postwar expansion for yet another quarter as a rebound in housing following a bureacratic driven crunch on new starts supports headline growth and rising wages give some relief to ever struggling consumer demand. However, the increase in the leading index doesn'tnecessarily mean conditions will improve substantially since the index has been on a declining trend since it peaked in 2006, and what we have been seeing is to some extent a rebound from the very low levels registered last autumn.

Doubts about sustainability certainly linger however, and Japan's longest postwar expansion may well be coming to an end, as record crude oil and raw material costs discourage companies from hiring and spending another government report showed. The Japanese economy may be reaching a "turning point,'' the Cabinet Office said earlier this week after releasing figures that showed the coincident index, a measure of current economic activity, fell to 101.7 in April from a revised 102.4 in March.

The Japanese government hasn't described the economy in these terms since the recession of 2001. Factory output has been falling and corporate profits are deteriorating, indicating that there may well be an underlying loos of Japan momentum since growth the first quarter. The issue I think very much depends on what happens to growth in those emerging markets where Japan has been sustaining its export expansion, and the future of this growth depends in large part, I think, on what happens to inflation.

To add somewhat to the confusion produced by this plethora of reports it is also worth noting that the Japanese government recently changed the methodology behind the leading, coincident and lagging indexes. All of these are now composite indexes, which means they reflect the magnitude of the ongoing improvement or deterioration in economic indicators, whereas previously they were diffusion indexes whose results depended on whether indicators had improved or worsened from three months earlier. So a certain amount of caution is advised in reaching any strong conclusions here.

In other recent reports we get further evidence of how rising energy and commodity prices may be hurting businesses and consumers. Bank lending rose at the fastest pace in 16 months in May as companies borrowed more to pay for costlier raw materials, according to the Bank of Japan.



Economy Watchers Index


In addition Japan's economy watchers' index, which measures workers' perception of economic trends, fell for the second straight month in May as the cost of living increased with the rise in petrol prices. The major index for current conditions fell to 32.1 last month from 35.5 in April, the Cabinet Office said. The index hit 31.8 in January, the lowest since December 2001.




The data showed that workers' perception of Japan's economic recovery has been 'extremely weak,' the Cabinet Office said. The index measures whether respondents with jobs most sensitive to economic conditions, such as taxi and truck drivers, department stores sales staff, as well as restaurant and shop owners, believe economic conditions are better or worse than they were three months before.

A reading above 50 indicates that most respondents believe conditions are improving while a reading below 50 suggests that most respondents think conditions are worsening.

The forward-looking index, which measures expectations about economic conditions in subsequent months, slipped to 35.1 in May, the lowest since December 2001 when the index hit 33.2. The index stood at 36.1 in April.


Consumer Confidence


Japan's consumer confidence also fell in May to the second-lowest level on record. The index dropped to 33.9 from 35.2 in April according to the Cabinet Office. May's reading was the lowest since December 2001, when the index touched a record low of 33.0.

Wednesday, June 04, 2008

Japan Capital Spending Q1 2008

Japanese businesses investment fell less than previously anticipated during the last quarter according to the latest data from the Ministry of Finance. Capital spending (excluding software) fell 5.3 percent in the three months ended March 31 from a year earlier.

While business investment has now fallen in each of the last four quarters, the pace of decline is less than half that recorded during Japan's three most recent recessions. If today's numbers are anything to go by it is quite possible that the Japanese government will raise its first-quarter economic growth estimate on June 11.

So at the present time the Japanese economy is showing much more resilience than in 1998 or 2001. The reason for this resilience is not hard to find. It is certainly not the result of a resurgence in domestic consumption, but rather continuing strength in exports, even as demand for Japanese products from the US declines, and from the Asian tigers and the EU slows. Te source of the extra demand is evidently China, and now other emerging economies like Indonesia, Vietnam, India, Brazil and Russia. As long as these emerging economies keep expanding rapidly, Japan can sustain. But for how long will this be? Inflation is becoming a real bugbear, and the situation in some of these economies (especially Vietnam and Russia) is in danger of turning critical. There is a certain irony in the fact that inflation may indeed be the undoing of the present Japanese expansion, but not domestic inflation but rather inflation among the emerging economies (the Economist had a useful summary of the current position here).

Monday, June 02, 2008

Japan Wages and Employment April 2008

Average total cash earnings rose in Japan rose in April for the fourth consecutive month as companies added full-time workers to comply with new labor regulations. However the arrival of inflation has meant that in real terms (ie allowing for inflation) contractual wages actually fell year on year. Monthly wages, including overtime and bonuses, were up 0.6 percent from a year earlier to 281,246 yen ($2,670), following a revised 1.5 percent increase in March according to data from the Labor Ministry in Tokyo this morning. When corrected for inflation, however, basic wages (without bonuses, overtime etc) were down 0.4% year on year, marking the first such decline since December.





It is a bit difficult to know what is actually going on here, certainly bonuses must be part of the picture. Employees at manufacturers worked less overtime in April as production slowed, limiting wage growth for the month, according to Shunichi Ando, head of the Labor Ministry's statistics division. Working hours at manufacturers fell 4.1 percent, the biggest drop in six years. In construction, however, overtime was up 11% y-o-y.

The number of people employed on a full-time basis rose 2 percent year on year, exceeding the 0.8 percent increase in part-time staff, as new labor rules lead companies to treat more temporary workers as permanent employees.



Hiring of full-time workers has been accelerating since October as companies anticipated the new labor regulations, which came into effect on April 1. The 0.8 percent increase in part-time staff last month was the slowest rate of increase for part time workers since December 2005.