By Claus Vistesen (Copenhagen)
Much pomp and circumstance was certainly made in relation to the fact that Japan actually grew in the second quarter at a full annualized 3.7 percent in the second quarter of 2009. Yet, the underlying numbers to suggest a recovery are still sorely missing. Deflation now seem to have taken hold, unemployment is rising fast and although the recent manufacturing PMI provided us with an upbeat signal, the underlying trend still is still that of a very tepid recover, if at all, or just a plain slump.
Japanese businesses cut spending for a ninth quarter as the global recession squeezed profits, underscoring the challenge for the incoming government to sustain a recovery from the country’s worst postwar slump. Capital spending excluding software fell 22.2 percent in the three months ended June 30 from a year earlier, after dropping a record 25.4 percent in the previous quarter, the Finance Ministry said today in Tokyo. Profits slid 53 percent.
Sales fell 17 percent, the second-biggest drop on record, indicating global demand hasn’t recovered enough to encourage companies to buy more plant and equipment. Sanyo Electric Co. and Seven & I Holdings Co. are among businesses scaling back. “Companies have too many resources, and until that situation changes, they won’t have to invest in more equipment and they won’t need to hire more people,” said Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo.
(click on graphs for better viewing)
On a y-o-y and q-o-q basis, the sales of Japanese companies fell 17% and 4.5% respectively. Especially, manufacturing in general and machinery and equipment producers saw a rapid decline in sales. Investment in plants and equipment fell back sharply on an annual as well as a quarterly basis at 21.7% and a full 39.1% respectively. The pronounced fall in Q2 investment owes itself to an abnormally large outlay in Q1 2009 which has consequently been paired in the period just ended. As can be seen in the graphs to the right, the manufacturing sector has been hit much harder than the non-manufacturing sector which is not difficult to understand if you think about the fact that it is this sector of the Japanese economy which is most exposed to the external environment. This is to say, that the manufacturing sector's top line is very sensitive to external conditions on the margin. Between Q4-08 and Q2-09 the cumulative drop in Japanese manufacturers sales was a whopping 35% almost double that of the non-manufacturing sector's corresponding toll of a drop of 18%.
With respect to investment in plants and equipment (corporate capex) the picture is, interestingly, the reverse with the investment by the non-manufacturing sector falling much more sharply during the present turmoil. On a four quarter moving average basis, the change in investment in plants and equipment for of the non-manufacturing sector has been falling ever since the first quarter of 2006 with a cumulative drop of 37%. The corresponding number for the manufacturing sector shows that the investment of plants and equipments have been falling since the third quarter of 2007 with a cumulative drop of 19%.
Finally, in the context of operating profits (that is, profits derived soled from the company's primary operations), the non manufacturing sector is still well in the black whereas the manufacturing sector has moved from a figure much below average in Q4-2008 to outright red figures in Q1-09 and Q2-09. Between Q1 2000 and Q3 2009 the average quarterly profit (nominal) for Japanese manufacturers was a little over 4 billion Yen.
In Q4 2008, the consolidated profit read 761 million yen and in Q1-09 and Q2-09 the numbers had turned into an outright decline with negative profit of 3.5 billion and 645 million respectively. Conversely, the non-manufacturing sector was, albeit still below average, performing much more strongly with solid black numbers throughout the crisis.
No Recovery Here
While there certainly may be places the newly elected party to rule Japan can look for green shoots and evidence of an impending recovery in Japan, corporate capex and profit numbers are not one them. Neither are, of course, the labour market, the deflation debacle, as well as the household sector which leaves us with the obvious question of where then? Second quarter clocked in better than most had expected and ironically, despite the analysis fielded above, upbeat signals from industrial production and the manufacturing sector in general are cited as the main reason. I will let my readers judge for themselves by perusing the graphs above and then also note the following crucial point made by Soc Gen's Gleen B. Maquire in one of their recent economic outlook reports (my emphasis);
The bulk of the contribution to growth came from net exports. Exports increased by 6.3% qoq while imports declined by 5.1% qoq. Overall, net exports contributed 1.6ppt to Q2 growth. The recovery in the Japanese economy is starting to look eerily similar to the 2001-03 recovery when Japan emerged ahead of Europe and the US. This is largely a China dynamic with Japan’s exports to China (and indirectly to the rest of Asia) recovering in step with China’s stimulus measures coming on line.
Industrial production is responding to robust demand from China for capital equipment and
industrial goods as well as tentative signs of a recovery in the durable goods cycle within Asia and globally.
So, this appears to be an export story in which case positive news from Japan should not surprise us at all. Macquire goes on to argue that since Q2 did not see a bounce back in inventories from the sharp de-stocking of Q4-08 and Q1-09 this, expected, bounce in inventories. I remain skeptical of this claim since I don't necessarily believe that the new level of growth will necessarily support any rapid re-stocking of inventories, but time will of course tell very soon.
Finally and specifically in relation to the analysis above, it is also interesting to ponder the discrepancy between the manufacturing and non-manufacturing sector in relation to the idea of Japan being dependent on exports to grow. Clearly, the manufacturing sector's higher sensivity with respect to the financial crisis and its top line makes sense since external conditions deteriorated very rapidly. Conversely, the domestic economy of Japan was not struck by a major, and relatively large, credit crunch. Hence, we see the top line of non-manufacturers relying more on domestic demand decline less. On the other hand, in relation to corporate capex the manufactures' slump in investment is very exclusively tied to the financial crisis while that of the non-manufacturers seem much more broad based. Once again can we rationalize this through the idea that the manufacturers remain tied to external conditions while that of the non-manufacturers is increasingly tied to the domestic market.
So, does this last niggle make sense? I am not sure, but it would be an interesting thing to check.