Japan Pensions: The Unkindest Cut

One of the less palatable consequences of deflation is of course the reality that what goes up can also come down, that systems where wages and pensions are effectively indexed to prices mean, that when prices come down, wages and pensions come down too. Of course, what is less well studied is how such reductions will be received and understood by those on the receiving end. Among other important consequences of today's decision to reduce indexed pensions in Japan must be the implictation that, in the eyes of many with responsibility for decision making in Japan, deflation is now settling in for the long haul.

Japan's retired population will for the first time suffer the consequences of deflation when the government cuts the monthly pension by 0.9 per cent in line with the falling consumer price index. Until now, retired people in Japan have been largely shielded from the effects of deflation, since a political decision to decouple their benefits from the CPI when prices began to fall three years ago. Most retired people, few of whom are exposed directly to the stock market, have benefited from deflation, which has boosted their real spending power. The government's decision to make pensioners share some of the burden amid a stagnating economy and sharply worsening demographics is highly symbolic. It could well presage aggressive moves to renege substantially on promised pension benefits, analysts said.

On Friday, the cabinet re-established the link between prices and pensions, which were first indexed in 1973. As a result, the state pension for an average head of household will be cut by �2,140 ($18, �17, �11) to �235,980 a month. The move could change the psychology of deflation, Jeffrey Young, senior economist at Nikko Salomon Smith Barney, said. "The relinking of benefit back to the CPI may start to convince seniors that deflation is not the greatest thing in the world," he said. "This is the first time that, in a very direct and visible fashion, they can see: 'Oh, falling prices means my income is going to be cut as well'." Explaining the change of policy, a government official said it was necessary to prevent the deterioration of the social security system's finances. The system fell into deficit for the first time last year, a situation that will get significantly worse. The labour force is shrinking by 0.6 per cent each year as baby boomers retire, reducing the size of total premiums and raising the amount that must be paid out in pensions.
Source: Financial Times
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Japan Actively Intervenes to Keep the Yen Down

So much of the speculation was right. The Japanese yen definately isn't accompanying the euro on it's climb upwards - some things in life you just have to do alone - and they have spent this month alone 5.6 million dollars (in yen of course) to back their determination. The curious thing is that they tried to keep quiet about it. My feeling is that it is now only a matter of time before the ECB gets the message and starts to intervene itself, whether by dropping rates or selling euros, before we have the curious spectacle of three of the four major currencies trying to beat themselves down. Sterling could then be the one with the problem, since with house prices rocketing the BofE certainly won't be looking to bring rates down, except that with Blair backing Bush on Iraq, so the petro dollars won't be heading for London any time soon.

Japan's Ministry of Finance intervened in the foreign exchange market this month to weaken the yen, but did not tell investors until monthly data on Friday uncovered the transactions. The Bank of Japan used some Y678bn ($5.6bn) in a series of actions to buy dollars for yen to stem the Japanese currency's appreciation. An official on Friday said the move was designed to stabilise the yen rather than actively weaken it.Despite the weakness of Japan's economy, the dollar's renewed slide has led the yen to strengthen in spite of officials' attempts to talk it lower. The Japanese currency has gained some 6 per cent in the past two months, prompting concerns about the damage a stronger currency will do to exporters' balance sheets and its possible impact on Japan's struggle against deflation.

The dollar stood at Y119.3 against the yen on Friday, up from three-month lows at Y117.5 earlier this month. Analysts said the covert nature of the BoJ's actions was a surprise. The bank, which holds massive reserves, has frequently intervened publicly in the market to limit yen strength and last acted in a series of moves between May and June last year.
Source: Financial Times
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COMMENT

Why Japan Matters

Morgan Stanley's Robert Alan Feldman points out, at a time when many seem to have forgotten that Japan exits, why Japan continues to matter.

Yet another way Japan matters is in helping to integrate China into the world economy. Compared to other countries, Japan trade with China is more complementary. Japan produces many things that China cannot produce for itself yet, and China produces many things in which Japan has no comparative advantage at all. The gains from trade between capital-intensive Japan and labor-intensive China are huge. Of course, the commodity producers will also reap major gains from trade with China. However, compared to many manufacturing-oriented economies, Japan is in a rather good position, even if there are still some industries where Chinese products will replace Japanese ones. In addition, Japan is one of the few countries that benefit from the interaction of demographics and trade. The working-age population in Japan has already begun to decline, and so inexpensive Chinese products are crucial in supporting the Japanese standard of living. The business opportunities from this trade complementarity are legion. True, many in Japan are scared of China. Surprisingly to me, these fears are shared -- and amplified -- in other countries. My colleagues who cover Latin America were particularly anxious about Chinese competition in some of their industries.

Finally, Japan has a prominent place in the debate about how macroeconomic theory should be applied in financial markets. Is deflation solely a monetary phenomenon, or is it also a real phenomenon -- e.g., due to insufficient structural adjustment that has prevented the absorption of redundant workers? Countries around the world, faced with structural rigidities (e.g., Germany) or rising imports from China (everywhere), will face the same problem that Japan has grappled with for a decade. Japan�s experience is precious. Moreover, investors in many markets now face the issue of valuation of equities in a deflationary world. Who has more experience in this than Japan?
Source: Morgan Stanley Global Economic Forum
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The Bad News From Japan Continues

Unemployment up, GDP and consumer prices down, there certainly doesn't seem to be any end in sight for Japan's economic woes. Add to this the fact that industrial production contracted in December for the fourth consecutive month, and that the Nikkei touched 20 year lows this week, and it's easy to see there's little cause for optimism. Nevertheless some still seem able to call bad news good, even if the little glimmer of hope, the changing ratio of applicants looking for work to jobs, may be more a reflection of the fact that older people are leaving the job market than anything else. The good news, that is, is that the unemployment problem can be thought by some to be improving because as the population gets older more peolple are retiring, or staying at home to care for the elderly!!

Unemployment in Japan reached a post-war high in December while the deflation that has racked the economy for three years showed no signs of alleviating. Economists are forecasting the economy to contract in the fourth quarter. December unemployment reached 5.5 per cent. Though the ratio of new job offers to applicants rose to 1.04, its highest level since June 2001, the percentage of employed people in the workforce and those actively seeking work declined to 60.6 per cent. In a comedy of errors, Masajuro Shiokawa, the country's finance minister, initially said the jobless figure was "good news". He then retracted the comment after a ministry official whispered in his ear, presumably that the news wasn't so good. Mr Shiokawa said the rise in employment in certain sectors was a positive development.

The core consumer price index for December fell 0.7 per cent, year-on-year, though it held steady from the previous month. For the year, the CPI fell 0.9 per cent, its biggest year-on-year decline. Falling prices have plagued the economy for three consecutive years, making it harder for businesses to repay loans. "Deflationary pressures are still very strong, and with the cut in winter bonuses, final demand will be subdued for some time," said Ryo Hino, economist at JP Morgan in Tokyo. Peter Morgan, economist at HSBC in Tokyo, said that the Japanese CPI underestimated the actual degree of deflation by about 0.7 percentage points. Economists have long questioned the accuracy of Japanese economic data, which led to a re-vamp in the way gross domestic product is calculated. "The main reasons are that CPI does not include prices for short-term sale items, despite the fact that such sales are becoming increasingly common, and it does not adjust adequately for quality changes," said Mr Morgan.
Source: Financial Times
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