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Tuesday, September 30, 2008

Japan - While Consumer Inflation Falters, Wages Fall and Industrial Output Plummets

Japan seems to be really racking up a series of economic issues which lead me to think that this recession we are now entering which be neither short lived nor "light". Inflation continues to make its presence felt in a way which is not exactly disastrous after years of deflation, but which does mean that downward pressure on wages as the economy slows pushes consumption back, and that is just what we are seeing in retail sales which barely rose in August, in nominal (non inflation adjusted) terms, and thus fell in real terms. At the same time exports barely increased year on year in August, while industrial output fell back strongly. Rather unsurprisingly given all this the Tankan business confidence index hit its lowest level in 5 years.

Consumer Price Rises Start to Slow


Japan's consumer-price inflation rose at a 2 percent plus rate for the second consecutive month in August as Japanese companies passed on costs of food and other daily necessities to consumers who are seeing increasing pressure on their wage packets and purchasing power. Core prices, which exclude fresh food, were up 2.4 percent in August from a year earlier, the same pace as July, according to the latest data from the statistics bureau. Excluding food and energy (ie the core-core index), prices were unchanged in August from a year earlier after increasing 0.2 percent in July, so it is quite likely that inflation is now on its way out of the system as oil and food prices fall back further.




Unemployment Rises

Japan's unemployment rate rose to 4.2 percent in August, the highest in two years, and households cut spending, signaling consumers are unlikely to support the faltering economy. The jobless rate was up from 4 percent in July. The ratio of jobs available to each applicant fell for a seventh month to 0.86, the lowest since September 2004, the Labor Ministry said today. So labour market conditions are definitely worsening.



Wages Down


Japan's real (inflation adjusted) wages dropped (by 2.8% year on year) for the fifth consecutive month in August, and even nominal eages fell for the first time this year, suggesting that households will be more likely to cut than increase spending. Monthly wages, including overtime and bonuses, fell 0.3 percent to 283,473 yen ($2,699) from a year earlier, after a 0.3 percent gain in July, according to data from the Labor Ministry.





Household spending fell 4 percent from a year earlier, the sixth straight month of decline.



Retail Sales Up Slightly

Growth in Japan's retail sales slowed in August as the higher prices of daily necessities seem to have discouraged consumers from spending. Sales were up 0.7 percent from a year earlier after rising a revised 2 percent in July, according to data from the Trade Ministry.


Industrial Output Falls


Japan’s industrial production fell sharply in August, dropping by 6.9 per cent year-on-year and 3.5 per cent month-on-month, the largest decline since January, 2001, highlighting the downturn in export-oriented industries.




Exports Fall Back In August


Japan's export growth slowed in August, led by a record drop in shipments to the U.S.. Japanese exports grew by just 0.3 percent from a year earlier, following an 8 percent rise in July. The

A drop in demand for Japan's exports, which are the main driver of Japanese economic growth is having a signicant impact on an economy already suffering from weak consumer spending at home.



Japan even had a trade deficit - 324 billion yen ($3 billion) - the first since January, due ot the impact of record oil imports. Imports were up 17 percent from a year earlier.

Shipments to the U.S. were down 21.8 percent year on year in August, the biggest decline on record, and exports to Europe fell 3.5 percent. A weakening in overseas demand lead the Japanese economy to shrink at an annualized 3 percent rate last quarter.

Even export growth to the newly emerging economies has slowed, as central bank after central bank has raised interest rates in an attempt to contain inflation.


Aso Says Consumption Tax Rise "Unavoidable"


Prime Minister Taro Aso said today that raising Japan's consumption tax is unavoidable, although doing so immediately would be difficult given current economic conditions. Speaking to the Japanese parliament he said:

"We cannot avoid discussions on (raising) the consumption tax, but it is difficult under current economic conditions,"

Given the fact that Japan's debt to GDP ratio is estimated by the OECD at 182% of GDP in 2008 he could hardly say otherwise really, since Japan needs to tread very carefully with any backsliding on the commitment to balance the budget in 2011, on the other hand this does make for a very tight corner situation with the economy slowing as it is.

Tankan Down

And as if to ram the message finally straight home Japanese businesses showed themselves to be generally pessimistic about their prospects for the first time in five years, according to the Bank of Japan’s September Tankan survey, which underscored the impact of the global downturn on business sentiment. The widely followed Tankan survey for the three months to September showed sentiment among large manufacturers deteriorated for the fourth quarter in a row and was negative for the first time since 2003.

The Tankan index of confidence among large manufacturers fell to minus 3, turning negative for the first time since June 2003 when the index fell to minus 5. Sentiment among large non-manufacturers, small manufacturers and small non-manufacturers was equally depressed with the index for each group showing the worst reading since 2003.

Auto Sales Slump


Japan's auto sales slumped to the lowest in 34 years in the first half of this fiscal year. Sales in the six months through September fell 2.9 percent to 1.54 million vehicles, the lowest since 1974, the Japan Automobile Dealers Association said in a statement today. The total excludes minicars. Sales of cars, trucks and buses in September fell 5.3 percent to 310,992 from a year earlier.


Also Japan, which is the world's third-largest oil consumer, sawgasoline demand fall in August by the most for the month since 1953 as prices climbed to a record. Domestic gasoline sales totaled 4.69 million kiloliters in August, a 14 percent decline from a year earlier, according to the Ministry of Economy, Trade and Industry. That's the largest year-on-year decline for the month since the government started compiling data 55 years ago.

Wednesday, September 24, 2008

Shutting Down the Samurais?

By Claus Vistesen: Lausanne

It is not as if financial markets are short on action at the moment, and financial pundits and analysts are certainly being served an ample amount of ammunition from which to draw inspiration. With the recent news that Warren Buffet will be relinquishing his coffers of 7.5 billion to support the erstwhile jewel of investment banking Goldman Sachs, it is difficult for market participants to run fast enough to keep up.

One thing though which does not seem to be running at the moment (apart from the entire global financial edifice that is) is the market for samurai bonds which are yen denominated bonds issued by foreign entities in Japan. Or more specifically, after Lehman’s default many observers have voiced concern that this might effectively blunt what has hitherto been a very sharp business for both issuers and investors.

I have been writing about the samurais before not least because the market for these instruments has been growing tremendously [1] , but also because the capital flows epitomized by the samurais represent an important example of how an ageing economy such as Japan is a net provider of global credit. Coupled with the thesis of decline in Japanese investor’s home bias, the increase in issue of samurai bonds represent an important case study of the symbiotic relationship between old capital intensive and most importantly yield hungry economies and young economies in need of capital. Obviously, the distinction between old and young here is rather crude and as such, one big theme for the samurais in the past year has simply been the manner in which foreign financial institutions have sought Japanese capital due to the relative calm of capital markets in the kingdom of the rising sun. However, from a fundamental supply and demand perspective, I have also shown how the Samurais can be seen in a wider perspective of the necessity of Japan’s savings to go for yield.

In this way, I think that the structural driving forces for the continuing build up of samurai bond assets are quite strong. However, this does not mean that the collateral from the credit crunch will go unnoticed.

The sudden questioning of the future of the market for samurais is thus not surprisingly closely tied to the almost cataclysmic events in the US financial sector. More specifically, the dramatic demise of Lehman Brothers marked the first spectacular default on a major portion of samurai bonds. As for the actual figure it seems that even Bloomberg has some difficulties delivering a feasible point estimate, but in the region of USD 2 bill worth of samurai bonds outstanding seem a reasonable guess. Given the fact that Lehman is defaulting entirely on its outstanding debt, it has naturally cooled the sentiment of its Japanese creditors somewhat. Tetsuo Ishihara from Mizuho Securities Co. pinpointed it well when he said that; (courtesy of Bloomberg)

``It will be difficult for independent investment banks to sell samurai bonds after this,''

Of course, with investment banks out of the picture entirely there may not be much need to worry, but the underlying point should indeed be taken seriously. Aozora Bank Ltd., Mizuho Financial Group Inc. and Shinsei Bank Ltd were the biggest of Lehman’s Japanese creditors and in terms of the last of the three, credit default swaps rose 150 basis points as the Lehman bust became reality. Initial reports from the Japanese lender furtthermore suggest that the exposure has cost dearly. So far, the butcher’s bill indicate that net income may decline as much as 80% on the back of the exposure to Lehman.

``These figures leave a very bad impression,'' said Hiromichi Tsuyukubo, a hedge-fund manager in Tokyo at Myojo Asset Management Japan Co., which oversees about $150 million. ``The 38 billion yen to Lehman was already announced but the size of the downward revision is much bigger than expected.''

The sentiment in the wake of the collateral damage has not gone without notice on the supply side either with Deutsche Bank recently shelving plans to issue samurais until markets, or in this case required yield premiums, have found a more calm level.


Once Bitten Twice Shy?

Japanese savers may need yield, but they are not stupid and in general, I would presume a pretty careful bunch (in relative terms). As such, and while it seemed at some point that Japan’s savings not unlike Chinese, Middle Eastern and other SWF money rollers together would bail out the entire US financial system Japanese bond investors may adopt a once bitten twice shy mantle on the back on Lehman’s collapse. This need not however increase Japanese investors’ risk aversion in general and the decline in their home bias in particular. Or as Bloomberg’s William Pesek notes in one of his recent columns;

One reason Japanese banks bet on foreign names like Lehman has been their inability to get domestic consumers to borrow more. It's a key dynamic restraining growth. Fixing it will require hard work from all facets of Japanese society -- including samurai.

This is a point will made, but what if the inability of banks to get Japanese consumers to borrow more is an inbuilt function of the country’s demographic profile? In that case, I would submit that while Lehman may have dented Japanese investors’ appetite for samurais, they will soon head for the trough again. As such, I maintain my thesis grounded in a structural assessment of Japanese savers’ need for foreign yield. Given the low domestic interest rates and the low level of domestically generated growth, foreign debt instruments still look very attractive from the point of view of Japanese savers. Moreover, and given the fact that the unfolding credit crunch is not about to fade in any given sense of the word, the supply side [2] is not going to dwindle as companies will continue to have problems raising capital. This year’s bumper issues from giants such as Wal-Mart and Citigroup suggest as much, although the latter of course was a quite necessary attempt to shore up a credit turmoil struck balance sheet.

Conclusively, I think that structural forces will keep capital flowing from Japan into foreign asset markets and while the distinct market for samurai bonds may have been dented, I still see this market as an integral part of the bigger picture.



[1] Data compiled by Bloomberg suggests that the market grew 61% to 2.6 trillion yen over the past year.

[2] i.e. supply of bonds

Tuesday, September 16, 2008

Japan - The Recession is Here

By Claus Vistesen: Lausanne

It has been a while since I last had Japan under the spotlight where and where I noted that Japan almost certainly would be tumbling into or very close to recession. Since then, data have been pointing only one way really and with the recent downward revision of an already quite awful Q2 GDP reading Japan now seems certain to be flirting with a recession.

As per usual, I will peruse the most recent pile of data but now that Japan stands on the brink of yet another recession in the 21st century, I also think that it also finds itself confronted with a crucial question. What will happen to spending and the political situation in the wake of Fukuda’s resignation? I am no political specialists, but I will try to highlight the issue from an economic view point all the same.


All the Features of a Recession

As if the initial Q2 GDP reading was not tough enough clocking in at -2.4% y-o-y the revised figure released by the cabinet office of -3.0% suggests that Japan’s economy took a significant beating in Q2. On a quarterly basis Japan’s economy thus pulled the rather dubious trick of completely erasing Q1 0.7% growth rate meaning that growth in H01 2008 stands at 0% q-o-q. The corresponding figure for annual values is -0.2%. Given the sharpness of the contraction it should not surprise many that almost all components of GDP were down. Most important perhaps were net exports which failed to make a positive contribution for the first time in three years.


Especially domestic demand and investment weighed heavily on the head line figure and without neither government spending nor, more importantly, exports with net exports contributing -0.1% this is the figure you get. In general, Japan seems to be caught in somewhat of a vicious circle at the moment. With domestic demand congenitally weak and foreign demand now faltering corporate capex seems certain to fall back. Add to this, a decline in terms of trade due to the increase in imported goods prices as well as a fiscally strained government and you end up with a busted ship as they say in the sci-fi shows.

If we turn our attention to prices it seems that Japan got that last spurt of headline inflation pressure in July with all three indices posting positive rates.



The general inflation index rose 2.3% from a year earlier, but more importantly the US style core-of-core index managed to eek out a full 0.2% print. This brings the average, for this index in 2008, to 0% y-o-y. It is the first time since August 1997 that the core-of-core index posts such a gain. Clearly, and since the increase in inflation comes at a time when the economy is actually shrinking to the tune noted above, this is all about cost push inflation. The deterioration in Japan’s terms of trade represents an important underlying current here since Japan, for the most part, imports energy and food related produces. In so far as goes the domestic value chain inflation has only scarcely found its way to the market in terms of the core-of-core index, a point I have emphasized in my analysis before.

Given the rather violent setback of global headline inflation so far in H02 2008 and the imminent outlook of oil dropping to negative growth rates y-o-y towards Q4 Japanese consumers should once again find some solace, if only a little bit, at the pumps and in the supermarket as we move towards the end of the year. Of course, this will probably mean that Japan slips back into deflation in the core of core index, but it is important to understand that this seems to be the rule rather than the exception.

A further breakdown of domestic demand shows us that household consumption expenditures have contracted in every month so far in 2008. Even if the rate of contraction seems to be edging in the right direction, it still indicates that Japan has been hit extraordinarily hard by the recent bout of global stagflation.



Japanese consumers once again cut back on fuel and food expenditures while spikes in expenditures on furniture and clothing kept the index from plummeting completely. A worrying trend in the context of domestic consumer demand is furthermore that household income and wages have almost fallen off a cliff in recent months. Total cash earnings fell back 2.5% in July and household income was down 3.5% on the year. In light of this, it is difficult to expect the Japanese consumer to be able to muster that much debated second bulwark against recession once foreign demand trends down.

As for corporate sector the overall headline news was actually a rare bright spot as industrial production climbed 0.9% in July from June where it fell 2.2%. While certainly down on an annual basis, industrial production still seems to be increasing at levels higher than those seen throughout 2006 and H01 2007. The news from the small services on the ground, in the form of Japanese small merchants, consequently point towards a further deterioration. This is no doubt strongly related to the slump in consumer confidence and spending and shows the extent to which the slowdown in demand is affecting businesses that are dependent on the home market alone.


It is also difficult to see much upside in the July number given the slew of other incoming data. As such, the overall gauges for fixed capital formation in Q2 points towards a sharp de-acceleration of activity and one really finds it difficult to conclude much else than the fact that Japan is now in a recession.

According to Morgan Stanley’s Takehiro Sato one mitigating factor here may be the relative tight management of inventories by Japanese companies in recent years. The point here would be that since Japanese companies do not have a large backload of inventories to scale down, headline production may not have to slump completely. Sato remains skeptical of this analysis and I agree. Clearly, the inventory related argument ultimately depends on the actual rate and severity of the incoming slowdown not least in Japan’s main export markets. It is clear to me that any sharp slowdown signals from China would mean for Japanese corporate capex to see a significant period of downscaling. In fact, with all external deficit economies slowing down sharply, it is difficult to have much faith in the inventory argument. The point here is simply that the level of industrial activity that the domestic sector can support in light of falling external demand may be much lower than many expect.

In this context and while exports continued to de-couple from the US in July imports also rose at record pace. The resulting narrowing of the trade surplus to an almost even balance is exactly what is robbing Japan from part of its growth engine. Clearly, and if the terms of trade are set to improve it could be all back to normal for Japan in H02 2009. However, it seems anything but certain that a correction is also coming in terms of emerging markets even if it will be relatively short lived. On that note, net exports and foreign asset income will be less of a driving force for growth in the latter part of 2008.

What is more, Japan also seems to be sporting its very own miniature residential investment crisis as bankruptcies amongst construction and real estate companies continued to climb to alarmingly high levels in August. Sato digs deeper into this issue and directs attention to the point that one of the main risks facing Japan is that credit dries up leaving even more companies without the possibility to carry on their operations. This tune is well known and has credit crunch written all over it. According to Sato, one of the main risks at the moment is consequently that the sharp contraction of credit and activity in the real estate sector could spread to other sectors. One key development to gauge here would be the trend in overall corporate bankruptcies, especially over the course of H02 2008.


Fiscal Stimulus to the Rescue?

The probability and discussion of fiscal stimulus to revive Japan’s economy got significantly more clouded with the recent decision of Prime Minister Fukuda to step down. The decision itself was not entirely unexpected as the PM, and his cabinet, has had a distinctly hard time getting their will through parliament, as the opposition controlled the lower house. According to Ken Worsley, Fukuda’s resignation is thus a part of a more fundamental strategy to install a special session in the Diet which allows the ruling party (the LDP) to pass a number of bills.

In the middle of all this there is a 2 trillion yen ($18 billion) expansive fiscal deal on the table. If the economy continues to deteriorate one would think that such a deal could be relatively swiftly passed by both chambers of the parliament. With mounting rumors of a general election in November, the current situation looks pretty unpredictable. . As with the impending and much debated consumption tax to widen the budget’s revenue base it seems that priorities in the political system are not yet straight when it comes to moving forwards, or backwards, on the fiscal front.

As could have been expected the candidates to replace Fukuda are rounding up and while I know way too little about Japanese politics to say anything about the individual contenders, it is clear that one issue high on the agenda will be what they intend to do with respect to the fiscal lever and by derivative the much debated reform ghost in Japanese politics. In this connection recent comments from various candidates reveal somewhat of a disagreement. Obviously, the difficulty with which Japan can actually use fiscal policy, saddled with a debt/GDP ratio of +180%, is not new. The outgoing PM consequently stated the following rather incredible claim a few months ago (quoted by Bloomberg).

There is nothing to be done but wait for export markets to recover.

I do find this rather interesting not least because it comes from, at the time, a leader of a country and an economy. Essentially, I agree with Fukuda though. It is very unlikely that Japan will be able to ignite domestic demand to a degree which will make the incoming slowdown milder. This is the nature of export dependency as a result of an ageing economy. However, the sentiment expressed also highlights, I think, a more profound perspective with respect to Japan’s policy makers’ relentless strides to rebalance the economy. Basically, Japan is now set on a growth path which no immediate policy can change. Anything short of a very local Japanese version of the IT induced positive productivity shock [1] would not do the trick, so there is, in fact, not much to be done. Of course, the sentiment turns almost delusional with comments quoted from Hiroaki Muto senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.

Japan's economy is weak because foreign demand is slumping and the terms of trade have been worsening, not because there are any big domestic structural problems.

I would grant Mr. Muto some of his argument in the sense that the specific deterioration in the terms of trade, this time around, has made matters worse. However, it is precisely because Japan has domestic structural problems that she is export dependent, and therefore it also because of domestic structural issues that Japan’s economy finds itself in a weak position when foreign demand falters.

This display of sentiment also seems to cut across the fistful of potential candidates on offer to replace Fukuda. Some seem to share the outgoing PM’s sentiment while some again seem to believe that a stimulus package, of some kind, would be appropriate. It is also important to note here that an 11.7 trillion yen stimulus deal is on the table. The deal is mainly targeted to alleviate funding conditions for small and medium sized companies. One of the main aspects must clearly be the extra provisions set up in the context of the shared credit responsibility implemented a year ago. Takehiro Sato and Morgan Stanley’s Japan team have been warning before of the adverse effects of letting banks assume part of the responsibility here in the sense that it would lead to a sharp retrenchment of credit to small and medium sized companies. I will let Sato himself provide the details

So alongside this new system created to ease funding problems, the new economic package also brings a wider range of safety net guarantees of different types.
Safety net guarantees lie outside the shared responsibility system, and have been used, as the name says, to provide a safety net for the SMEs that cannot access CGC-backed loans. Originally, about 70 sectors were designated as eligible for credit support based on criteria such as sales performance, but the number has almost doubled in the wake of the errant policy-induced housing shock that followed last year’s revision of the Building Standards Law. The eligibility of a debtor is decided by the external criterion of whether it is included in the specified industries and whether sales are down more than 5%Y for the latest three months, but the number of industries covered could rise as the recession deepens.

If the economy continues to deteriorate one would think that such a deal could be relatively swiftly passed by both chambers of the parliament. However, this seems far from certain with in light of the political limbo in which Japan now finds itself. As with the impending and much debated consumption tax to widen the budget’s revenue base it seems that priorities in the political system are not yet straight when it comes to moving forwards, or backwards, on the fiscal front.

More importantly, Sato also muses on the potential for the Japanese government to pull of the extra emergency provisions without having to issue more paper. I can see the argument in the sense that the government would only have to fork over its part of the cash if the debtor went belly up. In a general perspective however, any kind of slack in terms of loosening fiscal policy, which really only could be financed through the issue of government bonds, would certainly bring forth the rating agencies. Especially, any de-facto abandonment of the objective to balance the budget by 2011 would not be taken lightly [2] .

In any case, and as Sato also explains in some detail, it is not at all certain that fiscal stimulus would help boost the economy but merely shift liabilities from companies and the consumer over to the government. The key argument here is one of Ricardian Equivalence where by economic agents adjust their expectations so as to negate the initial effect from the fiscal windfall. Obviously, the shift in liabilities themselves would not be without advantage since the increased savings by households and companies would likely bring the overall discounted value of Japan’s liabilities down. [3] In essence though, this remains a very theoretical argument and should not distract us from the point that Japan is slowly but sure trending towards an end point when it comes to its public balances. At some point she simply won’t be able to pay and the international institutional set-up (rating agencies) and policy makers (G8 anyone) would be wise to think in alternative solutions here. The alternative in terms of some ageing countries’ abilities to fund their ongoing liabilities will not be pretty at all.

Moreover, if we take Sato’s argument to the extreme the theoretical future discounted value of Japan’s government debt could be made equal to the equivalent future discounted value of the entire stock of company and household savings. However, this is not the way it is likely to materialize.

As such and while I agree with Sato’s initial point that increased savings through deposits are likely to be channeled into cheap government funding, we also know that Japan’s savings are increasingly flowing out towards higher returns. Furthermore, this is a story with both a short term and a long term perspective, where the former is epitomized in Ms. Watanabe and her carry trading efforts and the latter by portfolio and investment outflows. As such, and given the current levels of Japan’s public debt ratio the theoretical process of funneling domestic savings into government bonds may not correspond to practice. I would hold this to be particularly doubtful in light of the fact that the income earned on foreign holdings of stocks and bonds are precisely what drive top line growth in Japan together with goods and services exports.


What Kind of Recession?

Now that everybody seems to agree that Japan is in a recession the focus has naturally turned towards the question of just how it will look. V(W)-shaped, U-shaped or perhaps even L-shaped are all potential scenarios at this point. Official authorities in Japan in the form of the BOJ and the Cabinet Office maintain that this will be a quick recession. The analytical landscape is less convinced though. Takehiro Sato seems to be leaning towards a somewhat nastier scenario. As I have highlighted above, a sharp emerging market correction in China would definitely be catastrophic for Japan. Also Mary Stokes from RGE sees considerable downside risk to Japan’s situation.

I tend to go for the more pessimistic of the narratives noted above. I also concur though that if headline inflation is set to decline as briskly as seems the case, it could just bring the relief Japan needs if she is not to falter completely. In the end however, external demand and asset income will, as ever, be crucial parameters to watch. This ultimately also means that Japan will suffer at the whims of the global economy.

On that note, I see considerable upside in places such as Turkey, Brazil, and India. Japan’s savers would be wise to expose themselves towards these regions in the future in their attempt to hold the most efficient global portfolio. Many great unknowns present themselves though. China’s development is crucial for the global economy, but also the potentially incoming train wreck in Eastern Europe and the instability in Russia could be one of those famous trigger points.

Conclusively, I see Japan limping ahead for the remainder of 2008 where foreign demand, all things equal, will be less of a driving force than hitherto.



[1] Given the rate of technology adoption and diffusion across economies today, it is very difficult to see how Japan would be able to sustain a relative competitive advantage in any sense of the word.

[2] Personally, I think that this is very unlikely to materialize in the first place, but as in other, more fundamental parts of life, commitments matter.

[3] I am assuming here that the government can finance its budget deficit more cheaply than individual consumers and companies.

Thursday, September 11, 2008

Japan Machinery Orders Fall For A Second Month in July

One important barometer of corporate capital spending fell for the second consecutive month in July, suggesting that manufacturers are bracing themselves for slower demand in the coming months. The Cabinet Office said Thursday core private-sector machinery orders, excluding the often volatile orders from electric power companies and for ships, fell 3.9 percent to 1.04 trillion yen ($9.67 billion) in July from June.



The decline, which was lead by a fall in demand from chemical and oil-product makers, follows a 2.6 percent decline in June and a 10.4 percent jump in May. Compared with July 2007 core orders fell 4.7 percent year on year. The figures, which are significant indicator of business investor sentiment over the next three to six months (both at home and overseas) is yet another bad sign for the Japanese economy.

Demand from the all important overseas sector was down 14.4% on June, which again is not a positive sign for forthcoming exports, or for Q3 GDP, which looks like it may well be heading for a second quarterly contraction.

Monday, September 08, 2008

Shares Up, Small Business Sentiment Down

Some rather contradictory pieces of news today. The Economy Watchers index is at a seven year low, Japanese stocks jump the most in five months, the yen falls the most in three months, bank lending remains almost stationary, while real estate bankruptcies surge. Make of all of this what you will, but the underlying reality is that we are now almost certainly in full recession as far as the Japanese economy goes.

Merchant Sentiment

Sentiment among Japanese merchants fell in August to its lowest level in seven years as higher food and oil prices crimped spending by households. The Economy Watchers index, a survey of barbers, taxi drivers and other who provide services directly to consumers, dropped to 28.3, the lowest since October 2001, from 29.3 in July, according to data out from the Japanese Cabinet Office today.




On the other hand merchants do expect business prospects to improve as energy costs ease. The index sub component which refers to conditions in two to three months time was up to 32 from 30.8, the first increase since February. Japan's gasoline prices have now dropped 4.8 percent since reaching a record 185.1 yen a liter ($6.45 a gallon) in the first week of August. Crude oil has fallen 26 percent since July 11.




Stocks Up


Japan's stocks in contrast jumped today, and by the most in five months, led by banks, following yesterday's announcement that the U.S. government was going to take control of mortgage lenders Fannie Mae and Freddie Mac. Basically this news is a Japan positive if it means consumption in the US will recover more quickly than it otherwise would have done, and this weekends intervention probably means that the US housing market will now recover sooner rather than later.



The Nikkei 225 Stock Average climbed 412.23, or 3.4 percent, to close at 12,624.46 in Tokyo. The broader Topix index added 45.57, or 3.9 percent, to 1,216.41. Both indexes gained the most since April 2, and all but three of 33 Topix industry groups rose.

Mitsubishi UFJ was up 13 percent to 850 yen, while Mizuho, the Japanese bank with the highest losses related to the U.S. mortgage market, climbed 12 percent to 463,000 yen. Both jumped by their daily trading limits. Sumitomo Mitsui Financial Group Inc., Japan's No. 3 bank, added 15 percent to 674,000 yen. The Topix Banks Index rose 12 percent, the most since April 1992. Japan's three biggest banks held a total of 4.7 trillion yen ($43 billion) in debt securities issued by U.S. government- related mortgage financers including Fannie Mae and Freddie Mac as of March 31.


Yen Falls


Conversely the yen fell by the most in three months against the euro and was also down versus the dollar as the Fannie Mae and Freddie Mac takeover seems to boost investor appetite for higher-yielding assets. The yen dropped by the most in six months against the Australian and New Zealand dollars, two of favourites for the so-called carry trade.

The yen fell as much as 2.2 percent to 157 per euro, before trading at 154.18 at 10:14 a.m. in London, from 153.67 in New York on Sept. 5. It declined to 108.57 versus the dollar from 107.73. The euro was at $1.4214, from $1.4267. The pound advanced to $1.7694 from $1.7661. Against the Australian dollar, the yen fell 1.6 percent to 89.34, from 87.91 in New York on Sept. 5. It declined 3.5 percent to 74.38 per New Zealand dollar.



These days it is quite normal for Japan's currency to rise when demand for higher- yielding assets falls, as was happening last week, and to rise when demand for these same assets bounces back again , since carry trades swing first one way and then the other as the so called "punters" try to guess what is about to happen next.

Generally in these trades, investors obrain funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent benchmark interest rate compares with 2 percent in the U.S., 4.25 percent in Europe, 7 percent in Australia and 8 percent in New Zealand. The risk to carry trades is that currency moves erase profits.

As can be seen, most of this has little to do with Japan's underlying situation, except perhaps insofar as the fact Japan is probably entering what might be a protracted recession means that the next move for Japanese interest rates is much more likely to be down than up, while if the Paulson "put" works, then the next move for US rates may well be up and not down. Essentially "carry" is like a large casino where the way to make money revolves around trying to "best guess" such eventualities.



Lending Growth Stagnates



Meantime, in terms of realities back on the home turf, lending growth at Japanese banks failed to accelerate for a second month in August as the economy moved closer to a recession and bankruptcies among real-estate companies surged. Loans excluding those by credit associations rose 2 percent year on year in August after expanding at the same pace in July, according to Bank of Japan data out today.

Capital spending fell, eroding demand for loans, as Japan's economy contracted - according to preliminary estimate which will almost certainly be revised for the worse - at an annualized 2.4 percent in the three months ended June 30, bringing the country to the threshold of its first recession in six years. Capital spending at Japanese businesses excluding software companies declined 7.6 percent in the three months ended June 30, making for a fifth straight quarterly decline.

The number of Japanese real estate companies filing for bankruptcy protection surged 23.5 percent in August from a year, while the number of property developers filing for bankruptcy protection reached 42 last month, according to Tokyo Shoko Research, a credit research firm, in a research report. The total number of bankruptcies rose to the highest for the month of August since 2003, gaining 4.2 percent from a year earlier. Liabilities at failed real estate companies more than doubled from July to 438.97 billion yen ($4 billion), although they fell 24.9 percent from a year earlier because of the bankruptcy a year ago of unlisted Azabu Tatemono KK with 564.8 billion yen of debt. Accumulated debt by failed real estate companies accounted for half the total liabilities among all Japanese companies that were declared bankrupt in August.

Wednesday, September 03, 2008

Inflation Accelerates Further In Japan, While Wages Stagnate and Spending Falls

Japan's consumer prices were up at the fastest date in more than a decade in July, while other data releases out in the last week show Japan's unemployment rate eased back from two-year high, household spending decreased, while industrial output rose.

Inflation At Highest Level Since 1997


Inflation in Japan, according to the general index, increased to 2.3% in July from 2% in June, thus clocking up the highest rate of price increases since October 1997, when prices rose by 2.5%.




The core CPI, which excludes volatile changes in fresh food prices increased by 2.4% year-on-year, and this index has now increased for 10 consecutive months. July's rise followed a 1.9% one in June.

Core "core inflation" - that is stripping out food (but not alchohol) and energy - was still only up a tiny 0.2% y-o-y, so this reading has only just poked its nose out of deflation territory, and may very easily hurry back into it if Japan really is in recession.

Core inflation in the Tokyo metropolitan area rose a preliminary 1.5% year-on-year in August (the Tokyo numbers are one month ahead of the rest), while the general CPI for the Tokyo area rose 1.3% in August, the biggest increase since March 1998.

Unemployment Falls

Separately, the Ministry of Internal Affairs and Communications said the unemployment rate in Japan eased to 4% in July from the two-year high of 4.3% in June, and it also came in below analyst expectations of 4.1%.



However, as unemployment fell, so did employment, and the number of people employed dropped back in July over June, falling from 64,510,000 to 64,060,000, or by about 450,000. Year on year employment was down 0.8% over July 2007. To understand why we have this dual phenomenon of falling employment and falling unemployment, you also need to think about Japans very special population dynamic, since the total population is both falling and ageing: thus the numbers of people in the "non labour force" category, which of course rose 540,000 in July over June, is on a secular rise.



The ratio of jobs available to applicants also fell for a sixth month to 0.89, the lowest level since October 2004.


Household Spending Down

Household spending fell back by an annual 0.5% in July (in real, price adjusted terms), leaving the average at JPY 298,366. July was the fifth straight month of spending decline, although incredibly the drop was under consensus analyst expectations, which were for a much sharper 1.8% fall, which had been the rate of decline registered in June. Overall household income was down 3.5% on year, with the income of household heads down 4.9%. Extraordinary income (ie bonuses) fell an annual 11% in July, while disposable income rose 3.9%.




And Wages Fall

Real wages were down in July falling at their fastest pace so far this year, putting even more pressure on household spending even as higher food and gasoline prices pressure the monthly buget. Japan's real wages index for total cash earnings fell 2.5% year on year in July, the fourth successive month of decline, according to Labor Ministry data.





Industrial Output Rises

Industrial production rose in July, and was up by 0.9 percent from June, when it fell 2.2 percent over May, according to data from the trade ministry said. The increase however wasn't enough to revise the government's assessment that output is weakening as export growth slows. On an annual basis, industrial production jumped 2%, although we should remember that July 2007 was a weak month for output due to the impact of an earthquake.



Overtime working hours among manufacturers, which correlate closely with industrial output, were down 4.9 percent in July, the most since March 2002.

Is The Recession Here?

Well despite the fact that IP went up, and undemployment went down, I would say that Japan is showing all the hallmarks of being in rcession, and we may well see further q-o-q contraction in Q3 2008. The Japanese government certainly consider this a real possibility and have announced plans to spend about 2 trillion yen ($18 billion) in an attempt to revive the economy. The initiatives include lower highway tolls, projects to help temporary workers find permanent tax cuts for low-income workers. But with debt to GDP now at 182% (according to the OECD) Japan really has very little room left for fiscal stimulus (and Claus will be coming in soon with an assessment of the implications of Fukeda's resignation).

Meanwhile consumer confidence is at its lowest level in at least 26 years, and I don't think we can see any immediate turnaround looming.