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Saturday, July 25, 2009

June Exports Sustain Upward Momentum But Surplus Employment Rockets

Japan’s June exports fell at the slowest annual pace this year, helping the trade surplus widen for the first time in 20 months. Shipments abroad were down 35.7 percent from a year earlier, following a 40.9 percent in May, according to the Finance Ministry. The surplus widened to 508 billion yen ($5.4 billion).




Real exports (adjusted for price change impacts) rose an estimated 8.0% over May (according to Nomura calculations), the fourth straight monthly increase. Q2 real exports were up 12.2% over the previous quarter, demonstrating a strong rebound from the 28.7% decline in Q1. Exports are clearly stronger. Nomura estimate that external demand made a +1.1ppt contribution to real GDP growth in Q2, a complete tirnaround on the –1.4ppt contribution in Q1. The export orders index in the manufacturing PMI, which many see as a leading indicator of Japanese exports, was also up 1.4ppt month on month in June, marking the sixth straight monthly of increase.



Nomura's seasonally adjusted regional export volume indices show improvement across all regions, but exports to Asia improved the most. Apr–Jun exports to Asia rose 18.9% q-q (versus –21.3% q-q in Jan–Mar), those to the US rose 7.4% q-q (–33.3%), while those to the EU rose a very weak 3.8% (–30.7%).


Faster growth (and faster lending) in China is evidently propping up sales for Japanese manufacturers. China, which grew an annual 7.9 percent last quarter, has now surpassed the U.S. as Japan’s biggest export customer. Chinese government subsidies to encourage consumer spending and investment in building projects have benefited Japanese manufacturers. In fact June exports to China fell 23.7 percent from a year earlier, the smallest drop since October.




Shipments to the U.S. declined an annual 37.6 percent, the least since December.



Sales to Europe slid 41.4 percent, the best this year, but still steep on the back of very weak quarterly growth



The largest contribution to higher exports came from electrical equipment, chemicals and transport equipment. Real exports of electrical equipment rose 23.9% q-q in Q2, following a decline of 26.9% in Q1, chemicals rose 23.2% (–10.6% Q1), and transportation equipment 7.7% (–42.0% Q1). The large increase in electrical equipment exports is generally thought to be related to higher exports of semiconductors and electronic materials, which are heavily weighted towards Asia. Exports of general machinery remained weak, falling 8.0% q-q in Q2 (–31.8% in Q1). Machinert exports have failed to recover since falling sharply at the end of 2008, and this is evidently a reflection of persistent weakness in capex generally, something which should serve to question a little the overall robsutness of recovery.

Japanese machinery orders dropped in May to a record low (see table below) with firms limiting their spending as the economy remained weak. Core private sector machine orders, viewed as a key indicator of capital spending, fell 3% from April to 668.2bn yen ($7.1bn). May's drop is less than the 5.8% fall seen in April, but still in sharp contrast to the 2% rise analysts had forecast.




Deflation Getting Entrenched

Japan is under continuing deflationary pressure, and consumer prices fell at a record pace in May, adding to the risk that deflation will become entrenched. Prices excluding fresh food slid 1.1 percent from a year earlier after dropping 0.1 percent in the preceding two months, the statistics bureau said today in Tokyo. This was the sharpest decrease since comparable figures were first compiled in 1971.

Even excluding food and energy, consumer prices fell 0.5 percent in May, the fastest pace in 22 months. Core prices in Tokyo, a harbinger of national inflation trends, fell 0.7 percent in June from a year earlier, making for the biggest drop in six years. The Bank of Japan now forecast that core prices, the central bank’s key gauge of inflation, will slide 1.5 percent this fiscal year and 1 percent in the next.



And wholesale prices seem to suggest worse to come. Japan's domestic corporate goods price index, the nation's benchmark measure of wholesale prices, fell a record 6.6% in June from June 2008. The result was marginally stronger than the 6.3% fall forecast in a survey of economist by Kyodo News and the 6.4% projected in a Reuters poll. It was also the largest on-year tumble on record. From May, the index was down 0.3%. Export prices were down 12.8% on year in June, while import prices were 32.2% lower.



Falling wages and unemployment rate at a five-year high are forcing households to reduce spending. Japan's jobless rate rose to 5 percent in April, the highest since 2003, and there are about two people looking for work for every job vacancy, the most severe job shortage on record. The Organization for Economic Cooperation and Development have forecast Japan’s jobless rate will rise to an unprecedented 5.8 percent in 2010. Real wages have now fallen for 11 consecutive months, the worst performance in six years.

And there may well be much worse to come. The government now estimates the number of surplus to requirements workers in Japanese companies jumped to 6.07 million in the first quarter of the year. This was the highest level ever recorded, according to the fiscal 2009 Annual Report on the Japanese Economy and Public Finance.The number of excess workers is calculated by subtracting the number of what the Cabinet Office deems to be the optimum number of employees from the actual number of employees. According to the white paper, the number of surplus workers had been on a declining trend after hitting a peak of 3.59 million in the first quarter of 1999, now, as can be seen in the chart below it is surging once more, and will be a harbinger of huge layoffs if global demand for Japanese products doesn't really pick up soon.



Unsurprisingly Japan’s retail sales dropped for a ninth month in May. Sales slid 2.8 percent from a year earlier. Department-store sales fell 12.3 percent in May, the 15th monthly decline, and supermarket sales also slumped. From a month earlier, retail sales were unchanged after rising for the first time in eight months in April.And declines in consumption may accelerate in coming months once the effect of Prime Minister Taro Aso’s stimulus measures wears off. The Japanese government has given cash handouts to residents, as well as tax breaks for fuel-efficient cars and incentives for buying eco-friendly televisions, refrigerators and air conditioners, and still sales fall.

Given the extent of the stimulus programme it is perhaps not surprising that Japan's overall household spending rose 0.3 percent in May from a year earlier in price-adjusted real terms. This follows more than twelve months where Japanese households had been continuously pruning spending as companies cut jobs and bonuses. Compared with April on a seasonally adjusted basis, spending rose 2.2 percent. Spending by wage earners' households rose 1.8 percent in May from the same month a year earlier.


Basically, the future of the Japanese economy hangs on the future of the global one. It is hard to see the economy advancing on the momentum of domestic consumer demand alone, and we should expect the positive push the economy has received this year from the various stimulus packages to diminish in 2010 as the incoming government (of whichever party) finds itself increasingly constrained by the burden of the growing volume of government indebtedness.

Monday, July 20, 2009

Daniel Gross on Mellowing Japan

By Claus Vistesen: Copenhagen


In a recent article published in Slate, Daniel Gross gets to the heart of the matter. Essentially, he argues that one of the principal reasons that Japan is not rising is that it has failed to do the homework in the human capital department or as Gross phrases it; while Japan is still leading in engineering, this is not the case with respect to social engineering.

Japan still retains its lead in engineering. A showroom at Panasonic's headquarters displayed a heated, multifunction toilet seat that conserves energy. (Wouldn't leaving the seat cold conserve even more?) The sleek Shinkansen bullet trains roll up to their appointed spots on time. TKX, an 87-year-old Osaka-based company that makes abrasives, has adapted its expertise to cutting silicon ingots into wafers for solar panels.

But social engineering is proving more challenging. Japan's population peaked in 2004 at about 127.8 million and is projected to fall to 89.9 million by 2055. The ratio of working-age to elderly Japanese fell from 8-to-1 in 1975 to 3.3-to-1 in 2005 and may shrivel to 1.3-to-1 in 2055. "In 2055, people will come to work when they have time off from long-term care," said Kiyoaki Fujiwara, director of economic policy at the Japan Business Federation.

Such a decline is cataclysmic for an indebted country that values infrastructure and personal service. (Who is going to maintain the trains, pay for social benefits, slice sushi at the Tsukiji fish market?) The obvious answers—encourage immigration and a higher birthrate—have proved difficult, even impossible, for this conservative society. In the United States, foreign-born workers make up 15 percent of the work force; in Japan, it's 1 percent. And, official protestations to the contrary, they're not particularly welcome. One columnist I met compared the standard Japanese attitude toward immigrants to that of French right-winger Jean-Marie Le Pen. In the 1990s, descendants of Japanese who had emigrated to South America early in the 20th century returned to replace retiring factory workers. Now that unemployment is on the rise, Japan is offering to pay the airfare for those who wish to return home.

Japan doesn't particularly want to import new citizens, but it doesn't seem to want to manufacture them, either. It's become harder to support a family on a single income, and young people are living at home for longer. And Japan isn't particularly friendly to working mothers—pre-K day care is not widely available, and the phrase work-life balance doesn't seem to have a Japanese translation. (The directory of the Japanese Business Federation, a showcase of old guys in suits, makes the Republican Senate caucus look like a Benetton ad.) The upshot: a chronically low birthrate. Too often, demographic change was described to me as a zero-sum game—rather than being seen as potential job creators, women and immigrants are often seen as taking jobs from men.

As Gross goes on to argue, Japan seems awfully passive about this and while there is certainly merit in discussing whether the size of the Japanese population is moving in the right direction it is the composition which really matters here. You only need to move back one entry here at this space get some kind of indication of the outlook for Japan's population composition. There is really no need to get into the whole discussion about whether economic growth is a goal in itself or whether Japan shouldn't have the right to conduct the policies it wants. Evidently, it has. However, for all those who believe that aggressive population management is desirable either be it through deliberate policies (a la China) or by simply allowing the demographic transition to run its course (i.e. Germany, Japan etc) they should also provide an answer towards the question of what to do with the market economy defined, as it were, by a social contract between generations, some form of paygo pension system, as well as a wide batch of centrally provided goods.

Gross' analysis is not far from the view presented in a recent article by me and Edward published in the summer edition of JapanInc. In this article, we argue that Japan is dependent on exports and that this dependence is a function of its age structure.

We also emphasise that Japan, for all intent and purposes, may be stuck in so far as providing a strong response towards the challenge of ageing;

While it is certainly true that the Japanese economy is currently struggling, it is not entirely true that there is no line of defense. Japan still has both monetary policy and fiscal policy tools at its disposal. The problem is that having spent a decade and a half attempting to fight the twin problems of deficient internal demand and ongoing deflation, the force of these tools has been steadily ground down. Interest rate adjustments, after many years when Bank of Japan (BoJ) rates have been held near zero levels, have little additional push to offer, while less conventional tools (like simply printing even more money via quantitative easing) or strong fiscal stimulus face clear limits in a country where gross debt to GDP is forecast by the OECD to hit 193 percent in 2009. So what can Japan do? Well besides simply grinning and bearing it, the tragedy is that there is not a lot that can be done in the short term. Evidently the Japanese government should give what support it can through highly targeted spending programs. The Bank of Japan, meanwhile, should be moving ahead with an aggressive policy of quantitative easing to provide as much relief as possible to Japan’s struggling households and corporates. But the only real way forward here is to try to slow the rate of population aging, and that means a change in national discourse and priorities, giving more support to those Japanese women who want to have children and radically changing the mindset about the extent to which Japan needs to promote an active immigration policy.

However, if we can all agree that the situation is difficult, it is hardly an excuse for not moving forward on the issues which ultimately will need to be adressed. Japan will need to foster a more conductive policy for increasing fertility as well as a substantial changed is discourse is needed with respect to immigration.

Monday, July 13, 2009

A Kickstart on Japanese Elections?

By Claus Vistesen Copenhagen

For regular observers of Japanese politics (which does not include yours truly) this will be something of a non event. In fact, it has been brewing for more than a while given the rising unpopularity of the ruling LDP and its stifled leadership (a wobbly minister at a G7 meeting springs to mind). However, it is still significant, I think, that the troubled PM Aso and his equally troubled party, the LDP have decided, in all probability, to throw in the towel. Now, one would imagine, begins a war over economic policies, consumption taxes, pension systems etc. The economic effects of this may be important once we get an indication of what the opposing parties have in store. Clearly, the Aso and the LDP in general look set to suffer a crunching defeat come August, but I won't even dare to venture a formal prediction. According to Reuters (see below), markets appear dissapointed that the elections would not come sooner, but then again; August sounds pretty soon to me. Clearly, much of the debate (and analysis) will center on the issue of why the ruling party headed by Aso has chosen to seek a renewal of its mandate at this particular point in time when it seems that it is bound to get mashed. But then again; desperate times and desperate measures ...

TOKYO (Reuters) - Japanese Prime Minister Taro Aso plans to call a general election on August 30, a top ruling party official said on Monday, despite the prospect that his long-ruling conservative party is headed for a big defeat. The decision to dissolve the lower house for a vote follows a crushing loss for the unpopular leader's ruling bloc in a Tokyo assembly election on Sunday that was seen as a barometer for the national poll, which is due no later than October.

Parliament's powerful lower house would be dissolved next week to set the stage for the election, Hiroyuki Hosoda, secretary-general of the ruling Liberal Democratic Party (LDP), told reporters. Moves within the LDP to replace Aso had been expected to grow after the party and its junior partner lost their majority in the Tokyo assembly but Hosoda said he saw no such moves now. A Democratic Party victory in the national election would end half a century of nearly unbroken rule by the business-friendly LDP and raise the chance of resolving political deadlocks as Japan tries to recover from its worst recession since World War Two. Chaos has gripped the LDP, with Aso's critics inside the party speaking of ditching him while the party's campaign strategist had tried to draft an ex-comedian for its ticket.

"It's clear if parliament is dissolved now, the result would be the same as the Tokyo election," Natsuo Yamaguchi, policy chief of the LDP's junior coalition partner, the New Komeito, told a TV Asahi program. The Democrats have pledged to pay more heed to the rights of consumers and workers than those of corporations and to pry policy-making decisions out of the hands of bureaucrats as a way to reduce wasteful spending.

If you have more info and comments please do feel free to drop them in the comments section. Like I hinted in the beginning, this is not a blog on political analysis, but given the huge amount of issues which are looming I am interested in the way the discourse evolves once the gridlock is officially absolved and the fight begins.

Friday, July 10, 2009

Deflation Grabs Hold of Japan

By Claus Vistesen: Copenhagen

I really don't want to beat a dead horse here and although I already gave it a kick in the context of the release of the May consumer price data I do think that this is pretty significant [quote from Bloomberg with my emphasis].

Japan’s producer prices fell at a record pace in June as oil costs declined and companies required fewer materials amid a global recession. The costs companies pay for commodities and unfinished goods tumbled 6.6 percent from a year earlier after sliding a revised 5.5 percent in May, the Bank of Japan said today in Tokyo. The median estimate of 22 economists surveyed by Bloomberg News was for a 6.4 percent drop.

Today’s report may stoke concern that deflation will take hold and hamper a rebound from the nation’s worst postwar recession. Bank of Japan Governor Masaaki Shirakawa said this week that his policy board will watch out for the risk that the economy and prices will slip below its forecasts.

“Viewing the broader price trend in the domestic economy, we would have to stress that homemade deflationary pressures are strengthening,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo.

As I pointed out in the context of the consumer price release and as a general rule of thumb we can expect all y-o-y inflation figures coming in over the summer to be biased downwards due to the low base effect from very high headline inflation during the summer of 2008. Yet, I also showed that with respect to the consumer price data it was not entirely a question of headline disinflation since also the core-of-core index slid substantially on an annual basis. This analysis is backed up by a closer look at the data from Ken Worsley which clearly indicates that when it comes to policy makers and analysts, "on the ground" as well as of course the message from the raw data, Japan's domestic economy is providing a clear deflationary bias at the current juncture.

Today's release of the corporate goods price index for June can probably be given the same analytical treatment in the sense that although the disinflationary bias from lower headline inflation will be there there appears to be a strong underlying gravitional pull from the deflationary pressure from the lack of domestic demand. One interesting point here is in particular the tepid change in discourse away from the stubborn anticipation of the feedback from higher energy prices to core inflation and thus, in relation to producer prices, that companies would push on higher input prices on to consumers. Clearly, this scenario did not materialize and one has to wonder whether counting on it to happen might not constitute a parallel to that famous play by Samuel Beckett.

Rather, it is noteworthy to see that many analysts and policy makers are now beginning to focus on the fact that the squeeze in prices is also a result of the fact that there are no pull inflation but rather the opposite; Kyohei Morita being one example here. Apart from being deflationary in and of itself it also means that whatever the amount of input inflation it is likely to be clogged up in the value chain eroding the profit margins of those companies who rely on domestic demand to sell their products. It is interesting in this regard to point out that if we look at the evolution in the monthly figure (3 period moving average), the trend is still distinctly deflationary and in this specific case petroleum and coal products actually contributed positively but was weighed down by other goods and commodities. The monthly figure has been negative on a three month moving average basis since January 2009. In the context of the annual figure the low base effect is substantial with petroleum and coal products decline 41%, but it is important to point out that the decline in corporate goods prices is broad based which indicates that the only thing we need to consider in terms of the low base effect is the level of the decline and not the sign. Finally, it is worth pointing out that in terms of export and import prices the decline in bigger in the former than in the latter on an annual basis which suggest that Japanese exporters might be scoring some points on this account (and here I am not accounting for the currency effect which may tip the load in any direction).

In conclusion, deflationary pressures are intensifying in Japan and it is important for a whole host of reasons. Most prominently, there is an expectational element here and one which may be particularly sinister in Japan. In fact, and if we have learned anything from this crisis it is that managing expectations and especially avoiding lingering expectations of deflation is a key policy parameter. In this sense it is worrying to see that the BOJ's effort, albeit valiant, may be falling short.

Thursday, July 09, 2009

Long term outlook for the yen

Yen: Safe Haven, But for How Much Longer?

"The Yen carry trade is long gone. Now that everybody else has the same "zero interest rate policies" the trade has been unwound. The Japanese economy is absolutely imploding as the fatal flaw in the great export experiment is revealed. No amount of so called "stimulus" at home will make up for evaporating foreign demand, especially after fifteen years of bridges to no where has satiated local demand. Japanese debt to GDP ratio is well over 100% and rising."

"Investors typically buy the yen as a haven for their cash because Japan’s current-account surplus reduces the country’s dependence on borrowing abroad."

Here's how it could work: Japan stays in deflationary mode until the yen drops, but that will take quite a while for demand for JGB's to be overwhelmed by supply. After all, all that money that is being repatriated into yen at a rapid pace gets *parked*, esentially, until a run for the exits happens. Think of the massive amount of JGB's out there, and all of the quantitative easing that the BoJ has done attempting to reflate. It would be a long term process due to Japan's trade surplus and the country's high savings rate, but eventually domestic savers will have to use their savings. The inflationary results of Japan's monetary and fiscal policy show up, and the currency loses value rapidly.