Those Savvy Japanese Housewives

(Cross-post from Alpha.Sources)

It has been a while since I have last reported on Japan so let us start with the basics which you may or may not already know. Last week the BOJ chose, as expected, to hold yet again on the continuing dim outlook for wages and inflation in Japan. Economic momentum as measured by investment and domestic demand seems to be doing fairly well but at the end of the day uncertainties remain the driver of the BOJ's reluctance to raise. However, SeekingAlpha reports that analists on a whole see the BOJ raising to 0.75% come August. This is all well and good of course but do remember here that the market sentiment is heavily biased at the moment riding on this 'global interest rate hike' narrative; especially since the yield on the 10 year treasury broke the magic 5% marker recently. All this of course could very quickly be deflated again if the data turns. As for the BOJ I expect it to data-driven as always with focus on wages and prices as well as domestic demand and it remains to be seen whether inflationary pressures will settle in Japan anytime soon, I have my doubts and I pretty much agree with Morgan Stanley's Takehiro Sato who sees Japan in deflation for the remainder of 2007. See also Sato's latest analysis on rising bond yields from a Japanese perspective. The continuous tightening of the labour market will be important here and of course the point at which the NAIRU actually is situated. The latest bid I saw was 3.5% and with unemployment currently running at 3.8% we will have to wait a little bit more it seems. Another thing would be to actually sit down and think about the whole situation in Japan and what the NAIRU actually 'means' in a Japanese context :).

Another point I want to highlight on Japan while I am here is this recent Bloomberg report on how Japanese housewives are increasingly joining the big institutional players on the carry wheel. Of course, these are basically the only retail investors who are able to do this since they have easy access to the currency (Yen) in the short position of the bet. All those leveraged bets from Japanese retail investors are of course keeping the Yen low much to the annoyance of forecasters persistingly looking for a pick up in the Japanese currency. The weapons of choice in terms of the long position ranges from the Kiwi (NZD), AUS, Real, GPD etc.

Japanese businessmen, housewives and pensioners betting against the yen in their spare time are wrecking the forecasts of the world's biggest currency traders.

The yen has slumped 4.6 percent to a 4 1/2-year low against the dollar this quarter, making it the worst performer among 72 major currencies and confounding predictions by strategists at Deutsche Bank AG and UBS AG for gains of about 1 percent.

The banks didn't reckon on the risk appetite of Japanese individuals, who are borrowing money like never before to buy currencies with higher yields. They tripled their trading in the year ended March to a record $11 billion a day, according to Tokyo-based Yano Research Institute Ltd., publisher of an annual report on the business. Globally, currency trading by retail investors rose 54 percent in 2006, according to research firm Greenwich Associates in Greenwich, Connecticut.

``Japan's interest rates are too low,'' said Hiroshi Ono, a 40-year-old sales clerk at a telephone company in Tokyo. Ono said he has made about $17,000 since March by borrowing $200,000 of yen and buying U.S. dollars to take advantage of the 4.75 percentage-point difference between Japanese and U.S. interest rates.

Japanese investors are borrowing yen at the central bank's 0.5 percent overnight lending rate and buying higher-yielding currencies in New Zealand, the U.K., Australia and even Brazil to increase returns on 1,536 trillion yen ($12.5 trillion) in savings. The strategy is called the carry trade.

All this is very interesting I think for two reasons. Firstly it will be interesting to how this affects short term consumption and saving patterns in Japan. At the end of the day this radical and rapid deterioation in the Japanese 'home bias' (see Stephen Jen) reflects a rigorous search for yield and to the extent that Japanese housewives keep on churning in on their FX market bets we should perhaps expect a pick up in consumption? Secondly, it raises obvious question on the nature of global capital flows and contrary to traditional textbook theory in which a large current account deficit should weigh on the currency some countries are almost sucking up too much capital from the point of view of macroeconomic stability. New Zealand and Australia are cases in point; who would have thought that a country with an external deficit would intervene in FX markets to actually depreciate its currency?!

As a friend pointed out to me in a mail:

This is financial globalisation really hitting home (another example might be the Austrian refi market in the
late 90s). So all this is going to be very important, it will now be much more difficult to refer to long-standing cultural differences.

Indeed, and it will be interesting to see what happens next especially bearing in mind the potential drivers of capital flows in the long run.

Outflow of yen from Japanese savers accelerating

That is according to Bloomberg, which has a story today describing how, referring to yen flows:

``It's reaching the point where the central bank must take rate action,'' says Hiromichi Shirakawa, a former Bank of Japan official and now chief economist at Credit Suisse Group in Tokyo. ``Capital is flowing out of Japan too quickly, making the economy vulnerable to currency fluctuations.''

Driving the flows are individual Japanese, of whom "a growing number... joining fund managers in shifting money out of Japan"... ""The bank is worried that when the carry trades unwind, households will get burned,'' says Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo. "..

The Bloomberg post mentions Japan's demographic situation, quoting Dai-ichi Life Research Institute: "A wave of retirees is likely to increase the flow even more. The first of Japan's 7 million baby boomers reach the retirement age of 60 this year, triggering lump-sum payments that will total 50 trillion yen for those born between 1947 and 1949"... the expectation is that those lump-sum payouts will be invested overseas...

It appears that the Japanese finance authorities are approaching a point where they will have to make a decision on their monetary policy that will have a major impact on Japan's economic situation for an extended period of time...

Unemployment in Japan

Now as we have been noting here on JEW over the last months, unemployment in Japan is trending steadily down, as can bee sen in the graph below which comes from the Labour Force Survey of the Japan Statistics bureau:



Now in part the decline in unemployment is a natural response to the - largely export driven - extended economic boom Japan has been enjoying recently, but this is certainly not the WHOLE story, since Japan, as is well known, has an ageing population, and in addition the population is actually now declining (and has been since 2005), as, of course, is the population of working age (and hence the workforce, if we take this as the conventional 15-65 age group, but see below). As such, absent immigration (and generally speaking Japan does not have any immigration worthy of mention as can be seen in this post) it is hard to see where Japan will find the labour to sustain economic growth into the future.




(Please click on image to see more clearly).

This chart has been extracted from an excel file which constitutes Table 1 on this page.

Now what can be readily seen is that while the total population started to decline in 2005, the working population (which is Japan is defined as everyone OVER 15) has been climbing (albeit slowly and steadily) for the last couple of years, a feature which is undoubtedly due to the growing proportions of the population in the older old age groups, and slowly increasing life expectancy. On the other hand, if you look at the totals for employed people, you will see that this actually peaked in the late 90s, and while the number has been climbing of late, we have still not reached the peak achieved at that time.

Although the data in the table is not seasonally adjusted, and thus difficult to intrepret, there does seem to have been a significant jump in employment in May 2007 (up to 64,440,000 from 63,351,000 in April, although this may yet be revised). Until we see more data it is hard to know exactly what to make of this, since in general we have been seeing signs that the Japanese economy has been slowing somewhat in 2007.

On point which is also worthy of attention is the percentage of employment which is part-time. This has been growing, and was up to 29% of total dependent employment in 2005 from 19% a decade earlier (this being the latest data I have to hand).

Another aspect which should not be forgotten is that the Japanese are fairly long-living, and participation rates in the higher age groups are high by international standards, as the chart below indicates.



So, all in all, a rather puzzling picture, where one thing seems clear, the current expansion is going to hit labour capacity limits at some point or another.

Update

I have now found some more data on part-time employment as a percentage of total employment. In April 2007 - according to the Provisional Report on the Monthly Labour Survey - there were 11,352,000 part time jobs, and 32,770,000 full time ones, which means that roughly 26/27% of employment was part-time. The Report also makes the following observation:

"Regular employees in April 2007 were increased by 1.6% compared with a year earlier, full-time employees were increased by 0.8%, part-time employees were increased by 3.6%."

Which seems to suggest that part-time employment has been growing rather more rapidly that full-time in recent months.

In line with this observation, the March Report says this:

"Regular employees in March 2007 were increased by 1.5% compared with a year earlier, full-time employees were increased by 0.9%, part-time employees were increased by 3.2%."

The February report says this:

"Regular employees in February 2007 were increased by 1.6% compared with a year earlier, full-time employees were increased by 0.7%, part-time employees were increased by 4.2%."

January this:

"Regular employees in January 2007 were increased by 1.6% compared with a year earlier, full-time employees were increased by 0.9%, part-time employees were increased by 3.3%."

December this:

"Regular employees in December 2006 were increased by 1.4% compared with a year earlier, full-time employees were increased by 0.9%, part-time employees were increased by 2.9%."

So the trend towards part-time work is definitely there, and this is obviously being reflected in average salaries. What will be interesting to look at will be the May 2007 data, to see how much of the new employment this month is part-time.

To get a final idea of what all this means I have looked at the earliest data in this series, for September 1998. At that time there were 34,755,000 full-time employees, which we could compare with only 32,770,000 in April 2007, so in the last ten years the number of full-time jobs has actually FALLEN by nearly 2 million jobs. At the same point the number of part-time jobs was 6,788,000 while by April 2007 this number had risen to 11,352,000, ie it had nearly doubled.

Immigration In Japan

Since the Japanese labour market is tightening all the time, and this process must have a limit given the declining labour force issue, I thought I'd take a look at the Japan immigration situation, and I found the graph I am posting below, which makes pretty sombre viewing. I think it shows what they call "flatlining".

Net Migration Compared. EU, USA and Japan



Source: OECD, Labour Force Statistics.
The vertical axis shows inward migration in thousands.
Click over image to enlarge

Net migration here is measured as the difference between the total population on 1 January and 31 December for a given calendar year, minus the difference between births and deaths.

Searching around for more info on the situation I found this useful article one migration information source: Japanese Immigration Policy: Responding to Conflicting Pressures, by Chikako Kashiwazaki, Keio University and Tsuneo Akaha, Monterey Institute of International Studies:


As of the end of 2004, 1.97 million foreign nationals were registered in Japan, accounting for about 1.6 percent of the total population (127.69 million) and representing a 1.3 percent increase from 1.7 million in 2000. (See Table 1.)

Koreans composed the largest group (607,000), followed by Chinese (488,000), Brazilians (287,000), and Filipinos (199,000). Well over 90 percent of resident foreigners came from either Asia (74 percent) or South America (18 percent).

Approximately 41 percent of registered foreigners are permanent residents, including 466,000 "special permanent residents," or former colonial migrants and their descendants.

The overall trend toward the settlement of newcomer immigrants is also indicated by the rise in the annual number of permanent resident authorizations, from less than 10,000 in 1996 to nearly 20,000 in 1999 and to 48,000 in 2004. The "permanent resident" status, for which there is no limit to the length of stay in the country, differs from the long-term resident status noted above. Meanwhile, approximately 15,000 people, mainly Koreans and Chinese, have been naturalized every year.

Among Koreans, many were students; the Chinese were generally trainees and students; and nearly 40 percent of the Filipinos arrived with "entertainer" visas. The "entertainer" status is given to actors, singers, dancers, and professional athletes; it permits an individuals to work in Japan for three months, six months, or up to one year.

One visa category that has received public scrutiny in recent years is that of "entertainer." This classification has been used by known and suspected criminal groups in Japan and abroad to bring prostitutes into the country. The government has begun enforcing stricter procedures for screening employers and employees in the "entertainment" industry and heavier punitive measures against violators.

the ageing of the population — and the beginning in 2005 of a population decline — have raised the urgency with which Japan must alleviate labor shortages and fiscal burdens resulting from these demographic trends. In particular, the business community has stepped up its call for a relaxation of labor-import control.

In response, the government has begun to consider relaxing restrictions on employment of certain categories of workers for which there are serious labor shortages, such as medical doctors and nurses. Foreign doctors and nurses must pass Japan's national examinations (ie written exams in Japanese) in their respective fields before they are allowed to practice.


I think the last point especially - about the exams for nurses - gives some idea of just how grave this situation is, and is likely to become, in the context of the severe demographic challenges Japan is facing.

This extract from an April 2007 issue of migration news is also informative:

Japan had two million foreign residents in 2005, up from 1.4 million in 1995. Two-thirds of the foreign residents are permanent residents, including Koreans who have been living in Japan for decades; there are 519,000 Chinese. The number of foreign workers was 180,000 in 2005, up from 155,000 in 2000 and 68,000 in 1990.

The sharpest increases have been in categories of foreigners who work but are not considered workers under labor law. The number of foreign trainees was 3,300 in 1990, 30,000 in 2000, and 87,300 in 2005. Most were Chinese, and many paid brokers $2,000 to $3,000 to get three-year jobs in small firms that pay $500 a month; trainees are also supposed to receive training. Some trainees leave the employers to whom they are assigned, citing long hours or abusive treatment, which subjects them to deportation.

JITCO, which administers the trainee program, says that it knows there are abuses, but says it lacks the authority to make unannounced inspections of Japanese firms with trainees. A 2005-06 study that relied on unannounced inspections found violations at 80 percent of the firms inspected.

The number of foreign students working part time rose from 11,000 in 1990 to 59,000 in 2000 and 100,000 in 2005.

The nikkeijin are descendents of Japanese migrants to Brazil and Peru. They began to receive three-year residence visas in 1990, and their number in Japan was 71,800 in 1990, 221,000 in 2000, and 240,000 in 2005. They do not have to work and can extend their three-year permits and change employers in Japan, and some of the jobs they abandon are filled by foreign trainees. Their children, born in Japan as well as abroad, are having difficulty integrating into Japanese society- many are neither employed nor in school.

The number of foreign overstayers was 106,500 in 1990, 232,000 in 2000, and 194,000 in 2005.

The first 15 Filipino nurses arrived in Japan to begin training to be health-care workers under a free-trade agreement between the countries. However, implementation of the broader free-trade agreement that is expected to increase migration has been delayed until Spring 2008.

The Japanese government continues to struggle to develop a migration policy. It seems clear that the foreign workers with the fewest rights, foreign trainees, often subsidize small firms that might be forced to close if low-wage workers were not available. The Neikejian, with more mobility, are able to find jobs shunned by local workers with the subcontractors of major firms.