Japan Industrial Ouput, Inflation, Household Spending and Employment April 2008

Japan's household spending fell the most in 19 months in April, factory production dropped and unemployment climbed, giving us yet more evidence that Japan's longest postwar expansion may now, slowly but surely, be coming to an end.


Industrial Output

Japan's industrial output fell a seasonally adjusted 0.3 percent in April from March as companies cut production due to rising inventories amid slowing demand from the United States, as well as from other key trading areas such as Europe, according to government data released on Friday. The seasonally adjusted industrial production index fell to 106.2 in April after hitting an all-time high of 110.2 in February.






Industrial output rose 1.8 percent in April from a year earlier following a 0.7 percent fall in March. The Ministry of Economy, Trade and Industry said that companies expect industrial output to rise 4.7 percent in May from April, but they anticipate that it will then fall back again 0.9 percent in June from May.


If these projections are met, the industrial output is set to rise 0.7 percent in the April-June quarter after clocking up the first decline in four quarters in the three months to March. But this is a big if.

"But there are worrying factors that we need to watch closely, which include developments in the North American markets, as well as the trend of consumer spending in Japan," a ministry official said..."In addition, we need to assess if demand for plasma TVs will pick up towards the Beijing Olympic Games this summer,".

Production in the electronics and telecom equipment sector dropped 7.6 percent in April, hit hard by a 47.7 percent drop in output of plasma TVs and a 22.0 percent fall in the output of cellular phone handsets. Output in the electronics parts and device sector fell 3.9 percent, the first fall in three months, hit by a 20.7 percent fall in output of plasma display panel modules and a 14.4 percent drop in output of large liquid crystal display panels.


Output of metal oxide semiconductor ICs (integrated circuits), used in cellular phone handsets, fell 20.0 percent from March ahead of the release of summer models. As a result inventories rose in this category by 5.8 percent in April from March, the biggest increase since September 2006 when they rose 6.6 percent.


Output for the transport equipment sector, which includes cars, fell 1.2 percent in April from March stringing together the second straight monthly fall. Production of medium cars - 1000 to 2000cc - fell 1.1 percent, while production of cars with engines of 2000cc or over fell 4.4 percent. In addition, output of large motorbikes - over 125cc - fell 26.5 percent in April from March, hit by declining sales outside Japan, especially in North America.


Consumer Price Inflation

Japanese annual inflation dipped to 0.9 percent in April, thanks to a short-lived cut in a gasoline tax, but this be just temporary relief and it is quite possible that a new decade-high looms again in May. Political infighting meant that the Japanese parliament blocked the renewal of a gasoline tax of ¥25 per liter, or 91 cents per gallon, giving motorists a month of lower prices in April before the government managed to renew the charge, just as rising oil prices sent gasoline higher.

Core consumer prices, which exclude fresh food, climbed 0.9% from the same period a year earlier after rising 1.2% March, marking the seventh straight month of price gains, the Ministry of Internal Affairs and Communications said Friday.

The core "core" consumer price index - which excludes both food and energy - was back in deflation in April, falling by 0.1% year on year.




Raising expectations for a higher May core inflation figure - core inflation excludes some volatile fresh food prices, - was fuelled by rising inflation in the Tokyo area, which reports consumer prices a month earlier, since in Tokyo core annual inflation rose to 0.9 percent in May, from 0.7 percent in April.



Household Spending


Japan household spending was down 2.7 percent in April from a year earlier, the biggest decline since September 2006, the statistics bureau said on Friday in Tokyo. This was the second straight month of decline and followed a 1.6 percent drop in March. The overall income of households fell 1.6 percent, with the income of household heads up 0.3 percent. Disposable income fell 5.4 percent.




Households cut spending on bread by 6.1 percent after prices rose 11 percent. They spent 14 percent less on spaghetti following a 30 percent price increase in the month.


Unemployment

Meanwhile the labour market is slowly weakening. Japan's job vacancies fell to a three-year low in April and the unemployment rate rose as higher energy costs eroded profits and discouraged hiring.

Japan's seasonally adjusted jobless rate rose to 4.0 percent from 3.8 percent in March, the highest since September, the statistics bureau said today in Tokyo. The ratio of jobs available to each applicant, a leading indicator of the job market, fell to 0.93 last month from 0.95, the lowest since March 2005, the Labor Ministry said.

The number of successful applicants excluding new graduates dropped to 15.3 percent, the lowest since the Labor Ministry survey began in 1963.

Japan Retail Sales

Japan's retail sales rose at the slowest pace in nine months as higher prices for food and energy seem to have prompted consumers to spend less on clothing and other items. Sales climbed 0.1 percent in April from a year earlier, the Trade Ministry said today in Tokyo.



Sales at department stores, supermarkets and convenience stores also declined in April. Sales at the Japan's largest retailers were down 2.2 percent from a year earlier, the biggest drop since July, today's report showed.

It is also worth remembering that since this data is not corrected for inflation, but is in real money terms, and given that inflation has been rising recently, this decline is a bit more pronounced than it might seem at face value. At the moment though it is clear that Japan household spending is losing momentum.

Japan Exports April 2008

Japan's year on year rate of export growth rebounded slightly in April as shipments to Asia and emerging markets helped the nation weather problems caused by the U.S. slowdown and a slowing expansion in Western Europe.

Exports, the main driver of Japanese growth (accounting for more than half of last quarter's expansion), rose 4 percent from a year earlier after climbing 2.3 percent in March, the Finance Ministry said today in Tokyo. But this pace of expansion is still considerably down on the roughly 8% average increase achieved over the four months November to February.




Shipments to the U.S. fell for an eighth consecutive month, and were down 9.1 percent in April from a year earlier. Export growth to China accelerated again on an annual basis, to 14.1 percent growth in April, up from 3.1 percent in March. Shipments to Asia, where Japan sends about half its exports, rose 7.2 percent after gaining 1.8 percent a month earlier, while those to Europe have now slowed noticeably, climbing only 1.3 percent year on year in April.





Imports were up 11.9 percent from a year earlier as oil prices surged to a record, narrowing the trade surplus by 46.3 percent to 485 billion yen ($4.7 billion). Year on year increases in the surplus are now down in the low single digits (4% y-o-y in April, 2.3% y-o-y in March) and this will be noticed, since it is the growth in the net difference between exports and imports which matters for GDP growth.

Growth to a fair number of newly emerging economies continues to be strong, with Vietnam (up 54.1% y-o-y), India (up 36.8% y-o-y), Indonesia (up 27.5% y-o-y), Brazil (up 31.7% y-o-y), Chile (up 80.5% y-o-y) and Russia (up 58.5% y-o-y) all making strong showings.

For some insight into how all this is working out in the emerging markets context see Claus's excellent post this week: Brazil's Economy - Not Emerging Anymore?

Japan Services Index and BoJ Economic Outlook

Despite the relatively healthy performance turned in by the Japanese economy in Q1 2007, the signs are that the impact of rising food and energy costs and slowing global economic growth (and hence demand for Japanese exports) are now taking their toll.

Japan's services sector, for example, bounced back slightly in March as consumers spent more to repair their cars, play golf and go to the theater. The tertiary index, which is a gauge of household and businesses spending on items ranging from phone calls, to power and transportation, increased 0.3 percent from February, the Trade Ministry said today in Tokyo, The uptick however followed a revised 1.6 percent decline in February, and as we can see from the chart below we are still below the level reached in January, and year on year the index is virtually unchanged.





Indeed tertiary demand, which accounts for about 60 percent of the economy, fell for the second consecutive quarter in the three months ended March 31, producing the first back-to-back decline since the economy emerged from a recession in 2002.



Evidence that households are cutting back on spending is now becoming pretty general and indeed household spending fell at the fastest pace in 15 months in March as prices of frequently purchased goods from milk to eggs climbed at an annual rate of 3.2 percent , more than double the growth in wages in that month.





Consumer confidence also dropped to a five- year low in April.





And consumers won't be able to count on higher paychecks to offset the impact of inflation because companies are unlikely to raise pay at a comparable rate as surging raw-material costs erode profit margins. In just one sign of the times example Japan Airlines announced last week that it was going to cut salaries and other benefits by 5 percent because profits are likely to drop 44.5 percent this year on fuel costs.

Meanwhile the Bank of Japan today kept interest rates on hold at their first meeting following a substantial reduction in their growth forecast. Today's meeeting was also of note since it marked the effective shelving of a two-year policy of seeking to raise interest rates.

``Japan's economic growth is slowing, mainly due to the effects of high energy and materials prices,'' the central bank said.

Exports rose at the slowest pace in almost three years in March.



At the same time production fell the most in at least five years in March.




The Bank of Japan dropped a call for gradual rate increases from its twice-yearly economic outlook published on April 30 and cut its estimate for this fiscal year's growth to 1.5 percent from 2.1 percent. It also forecast that consumer prices excluding fresh food will climb 1.1 percent, raising its inflation projection from 0.4 percent.

Over the last two years the economic outlook has consistently said that the bank would pursue higher interest rates, repeating the assertion that borrowing costs need to rise gradually as long as the economy keeps growing and prices remain stable. This has now been dropped but the report did retain a warning that continuing to keep rates at their current low levels could cause excessive investment and hamper growth in the long run.