Doldrums Japan

Japan continues its weary path. Nothing especially new or surprising here, but clearly with the number 2 and the number 3 economies heading stubbornly downwards, you have to give some though to what might be the implications for the number 1 economy. Also there's more for Joerg's list here: the rising youth unemployment as the big firms flexibilise and re-structure.

Economic data released on Friday showed that the Japanese economy remains locked in a low to no-growth pattern, with unemployment hovering near post-war highs and consumer spending continuing to fall amid a decline in wages. The April core consumer price index (CPI), a key gauge of deflation in Japan, remained unchanged at negative 0.4 per cent, year-on-year. Economists said deflationary pressures were likely to worsen amid the current trend of declining wages.

"Going forward, we see little possibility of a sustained rise in consumption and upward push on prices amid the downward trend in wages," said Mamoru Yamazaki, chief economist at Barclays Capital in Tokyo. "To the contrary, we expect retailers to continue lowering prices as they see consumers pinching pennies." Against this backdrop, May consumer spending fell 1.8 per cent, year-on-year, as households pared expenditures amid salary reductions and continuing high unemployment rates. The May unemployment rate remained unchanged at 5.4 per cent, just shy of a post-war high of 5.5 per cent last reached in January. The percentage of 15-24 year-olds who were unemployed reached 11.1 per cent, a rise of 30,000 from a year ago, almost double the unemployment rate of any other age bracket.

The increasing number of youths out of work reflects the increasingly stringent hiring practises of firms, which are cutting back on taking on new graduates amid cost-cutting and restructuring measures. It also reflects a social shift, as high school and college graduates increasingly shun the Japanese tradition of lifetime employment at a single company in favour of part-time jobs or pursuing creative interests.The one bright spot amid the dreary data were May industrial production figures, which showed output growth of 2.5 per cent, month-on-month, about 1 percentage point better than market expectations. Economists pointed out that over the past six to nine months, Japanese industrial production has been stable, whereas US output has been weakening.
Source: Financial Times
LINK

Japan Continues Its Weary Path


I suppose there are some crumbs for Joerg here, the Japanese economy did in the end actually grow, if only by a measly 0.1%, during the first three months. It is important to remember that these are real figures, in nominal (money) terms, with deflation continuing, the economy actually shrank. Although, of course, with the Yen rising, the share of the world economy may have increased. The only conclusion to be drawn from all this, economic statistics are complicated things. Bottom line, Japan seems to be moving back into recession.

Japan's economy grew slightly in the three months to March, according to revised figures released early on Wednesday which showed that while the pace of growth is still slowing, the economy did not contract in the first quarter as economists had predicted. Revised gross domestic product figures showed that GDP grew by 0.1 per cent in the first quarter. Provisional data released last month indicated the size of the economy stayed the same over the quarter, and economists had forecast that Wednesday's revision would reveal a contraction. But the revised figures provide only crumbs of comfort as they did not point to a turnaround in the economy, which has been slowing steadily in the past year. Some economists still say Japan's economy may be slipping back into recession - which is defined technically as two consecutive quarters of contraction. The loss of growth momentum has been blamed on a fall in exports to the US, where consumption in the first quarter was subdued in the run-up to the war in Iraq, and a pre-Sars drop in shipments to Asia. Household consumption in Japan, however, remained surprisingly strong as people dug into savings so they could spend and maintain the same standard of living. GDP grew 0.5 per cent between October and December, 0.8 per cent in the quarter before that and 1.4 per cent between April and June last year.
Source: Financial Times
LINK

Tunneling the Bottom of Japan's deflation Trap


A really rather unusual article from MS's Takehiro Saito, which argues that the decline in personal savings is not alarming since it is matched by a rise in corporate saving. This corporate saving will continue, he argues, since in deflationary times with a rising currency, and weak demand, cash, or domestic bonds (and in particular JGB's) are about the best investment corporate Japan can make. This is of course an extremely vicious circle, which explains why we should be so wary of deflation, and why talk of Germany only being in danger of 'benign' deflation is complete tommyrot. As Saito suggests: "a powerful equilibrium exists with close links among deflation, private-sector savings surplus (current-account surplus), and home country bias supported by yen appreciation and expect ongoing stability in the government funding base."

Despite considerable anxiety about the future of fiscal deficits premised on the loss of saving-investment surplus, we do not view stress applied by the declining household savings rate as a difficult challenge as long as corporate debt repayment continues spurred by asset price deflation. More disconcerting is the quietly advancing evaporation of the yield curve, which has easily surmounted all challenges thrown its way thus far. We believe all of the factors defining yield curve shape are tied together by the central concept of deflation. For example, sustained strong home-country bias exhibited by domestic institutional investors stems from deflation and the zero interest rate. Since real interest rates at home are always positive under zero interest rate policy (ZIRP) and deflation, investors have less incentive to move capital into foreign-currency-denominated assets. Furthermore, in contrast to the rise in real asset value and decline in cash and bond actual value under inflation, real asset value declines and cash and bond actual value increases under deflation. It therefore makes economic sense to hold home-currency-denominated bonds in a deflationary environment despite extremely low nominal interest rates. Forward discount bias from the constant positive discrepancy between domestic and foreign nominal short-term rates in a zero nominal interest rate situation also places upward pressure on yen value. From this perspective, domestic institutional investors are behaving in an economically reasonable manner within the context of deflation and zero interest rates.

Another factor is that excessive competition among financial institutions under debt deflation interferes with the correct economic behavior of setting loan interest rates based on credit risk. We expect long-term yields to stay at extreme lows as long as loan interest rates are inappropriately restricted to lows from the standpoint of arbitrage between bond and loan markets. The abnormality to us is loan interest rates, not long-term interest rates. We have repeatedly stressed the importance of rectifying loan interest rate levels. Yet this is not happening in reality with steady expansion of the overextended government-affiliated financial institution presence. We believe government policy is actually encouraging long-term interest rates to move even lower.
Source: Morgan Stanley Global Economic Forum
LINK

Technological Solutions to the Zero Bound?


Thanks to Brad Delong for putting up this link to a zero bound article by two economists at the Dallas Fed. It is clear that, with a little imagination, the technology exits to overcome this as a technical problem. But if the deflation problem is not, essentially, a monetary one, the substantive problem still remains: what to do about it? Let's just hope there's a learning curve in there somewhere, and these are esperiences we have to go through before we get to grips with the real problem. Question is: how much time have we got?

The most daring suggestion for escaping the zero-interest-rate trap is one that eliminates the zero lower bound altogether. How can this be done? As noted in the first part of the presentation, the zero bound on interest rates exists because money pays a sure nominal interest rate of zero. No one would be willing to hold any asset that pays a negative nominal rate, as long as zero-interest money is available as a store of value. The strategy for eliminating the zero bound, therefore, is to make money pay a negative nominal interest rate, by imposing some type of "carry tax" on currency and deposits.

It�s easy to envision such a system with regard to deposits at the Federal Reserve or transactions deposits at banks; for the most part, the technology to implement such a system is already in place. A tax or fee on Reserve deposits of 1 percent per month, for example, would mean that those deposits, in effect, pay a nominal interest rate of roughly minus 12 percent. The technological difficulty lies mainly in imposing such a tax on currency. In the 1930s, Irving Fisher of Yale University, one of the greatest American economists, proposed such a system, in which currency had to be periodically �stamped�, for a fee, in order to retain its status as legal tender. The stamp fee could be calibrated to generate any negative nominal interest rate that the central bank desired. While the technology available for implementing such a system is more sophisticated today than in Fisher�s time, enforcement still seems a mammoth problem, involving physical modifications to currency and some means of tracking the length of time each piece spends in circulation.Given the technological hurdles involved in its implementation, a carry tax on money may not be feasible as a response to any events that might transpire in the next year, though it certainly merits study as a possible response to events that might transpire in the next decade. This is particularly the case if achieving and maintaining price stability makes bumping up against the zero interest rate bound a more frequent event.
Source: Federal Reserve Dallas
LINK