Well there is a lot of attention being focused on the 2 day meeting of the Bank of japan which started today. Will tomorrow be Decision Day? Certainly the equity markets are nervous. Dave Altig at MacroBlog had a timely post yesterday about some of the possible pitfalls ahead, and Martin Wolfe has a piece on Japan in today's FT:
Japan is back. After almost one and a half decades of disappointment, growth is strong, deflation is vanishing and confidence is returning. Is this then the reward for Junichiro Koizumi's reforms? "Exactly the opposite" is the answer. If the prime minister had done what he initially proposed – pursue structural reform and cut fiscal deficits – the result would have been a catastrophe. Fortunately, wiser counsels prevailed.
In what way then is this an unreformed Japanese economy? It is still a Japan whose growth depends heavily on exports and investment, whose private sector saves far more than it can profitably invest at home and whose corporations waste capital. Japan is not recovering because it has a brand new economy: what has been achieved is a partial clean-up of the legacy of the bubble years.
As Martin Wolfe also points out:
Between the fourth quarter of 2001 (the last deep trough in gross domestic product) and the fourth quarter of last year, the economy expanded by 9.9 per cent, in real terms. Net exports generated an astonishing 30 per cent of the increase in demand, investment 18 per cent and government consumption a further 14 per cent. Private consumption generated a mere 39 per cent of the increase in demand.
The sharp improvement in net exports had two principal explanations: the depreciation of the real exchange rate; and China’s demand for Japanese technology. Between December 1999 and February of this year, Japan’s real broad exchange rate depreciated by almost 30 per cent, according to JP Morgan. This was not an accident: Japan’s foreign currency reserves rose by $547bn between December 1999 and the end of last year. Meanwhile, exports to China accounted for 30 per cent of the increase in Japan’s total exports between 2001 and 2005.
Japan has, in short, continued to derive much of its dynamism from external demand. It also continues to rely heavily on corporate investment. That may not seem surprising until one realises how overcapitalised the economy is by global standards.
The share of Japanese corporate investment in GDP is far higher than in other high-income countries (see chart). Most recently, it has been 40 per cent higher than in Germany or the US.
Overall, investment ran at 24 per cent of GDP in 2004. That such high investment has generated little growth in the recent past (and is expected to generate little growth in future) is evident. But what would have happened without it? Without some other offset, the result would have been not stagnation, but a depression.
Today’s new Japan is essentially the old Japan. It continues to rely on competitive exports, a sizeable current account surplus and wasteful use of its people’s savings to keep demand expanding in line with its disappointing potential rate of growth.
Japan Real Time Charts and Data
Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Japan related comment. He also maintains a collection of constantly updated Japan data charts with short updates on a Storify dedicated page Is Japan Once More Back in Deflation?
Wednesday, March 08, 2006
Thursday, March 02, 2006
More On The Japanese Recovery
The FT has a fairly balanced editorial this morning on Japanese monetary policy and on the potential pitfalls of an over-rapid tightening policy:
"There is no need to hurry normalisation. Japan's real economy is in increasingly good health. But the exit from deflation remains recent and tentative. The BoJ's focus on its definition of core inflation - which does not exclude energy prices - exaggerates the extent to which rising prices are entrenched in the Japanese economy. Core inflation excluding energy was just 0.1 per cent in December, and was negative throughout the rest of 2005. Land prices are still falling nationally, although at a declining rate."
This sounds like a voice of reason and prudence in an Ocean of rash speculation (Not Claus, naturally, but the atmosphere he is describing).
"There is no need to hurry normalisation. Japan's real economy is in increasingly good health. But the exit from deflation remains recent and tentative. The BoJ's focus on its definition of core inflation - which does not exclude energy prices - exaggerates the extent to which rising prices are entrenched in the Japanese economy. Core inflation excluding energy was just 0.1 per cent in December, and was negative throughout the rest of 2005. Land prices are still falling nationally, although at a declining rate."
This sounds like a voice of reason and prudence in an Ocean of rash speculation (Not Claus, naturally, but the atmosphere he is describing).
Thursday, February 23, 2006
On The Japanese Trade Deficit
I'm trying to think about the implications of the economic fundamentals driving Japan's 'sustainable recovery'. What we know is that as the population ages the labour market is tightening. This is pushing up wages but not productivity. There is a consequential 'bounce' in domestic consumption. But what happpens next?
Well my native economic wits tell me that the relative prices of Japanese imports and exports should be affected. This is a complex question since Japanese conglomerates have a well-known 'two tier' pricing system, with the cost pressure normally being felt more internally than externally. So Japanese exports don't necessarily immediately lose competitiveness. Of course the Yen-Dollar rate also has something to do with this.
But in the internal market the price of imported goods should become relatively lower vis-a-vis domestic products. So I started thinking about the trade balance. And Lo & behold:
"Japan recorded its biggest trade shortfall in nearly a quarter of a century and its first in five years, as the normal January slowdown in exports and a rising oil bill combined to reverse a Y914bn surplus in December into a Y349bn deficit."
Well so far so good, this is what theory would seem to predict. Of course there are any number of one-off issue in play:
Economists said the latest number was not a cause for concern since exports normally fell in January because of the long new year’s holiday in Japan, which caused a slowdown in production and shipments.
but then there is this:
Higher imports partly reflected rising domestic demand, as well as the surge in oil prices....Hiroshi Shiraishi, economist at Lehman Brothers, said that, as domestic demand picked up, it was natural — and positive — that the economy would become less dependent on exports. “Going forward, we don’t expect net exports to provide a big boost to gross domestic product,”
Oh, oh.
In the fourth quarter, which showed annualised gross domestic product growth of 5.5 per cent in real terms, domestic demand outpaced net exports as a contributing factor, underlying the self-sustaining nature of Japan’s recovery.
Mr Shiraishi said the volume of imports had picked up 7 per cent in January as Japanese demand for foreign products increased. In yen terms, imports rose 27 per cent to Y5,360bn, spurred by a 67 per cent rise in the oil bill over the previous January.
Morgan Stanley's Takehiro Sato tries to be re-assuring:
"Takehiro Sato, economist at Morgan Stanley, said it was unwise to read too much into one month’s numbers. Weak exports to Asia probably owned to special factors, particularly the Chinese new year, part of which fell in January this year, he said."
He may be right, but then when theory and empirics coincide in this way there is food not for worry, but for thought. Maybe what we are all about to do is an exercise in ordinary language philosophy: checking out what the word 'sustainable' actual means in the day-to-day context.
Well my native economic wits tell me that the relative prices of Japanese imports and exports should be affected. This is a complex question since Japanese conglomerates have a well-known 'two tier' pricing system, with the cost pressure normally being felt more internally than externally. So Japanese exports don't necessarily immediately lose competitiveness. Of course the Yen-Dollar rate also has something to do with this.
But in the internal market the price of imported goods should become relatively lower vis-a-vis domestic products. So I started thinking about the trade balance. And Lo & behold:
"Japan recorded its biggest trade shortfall in nearly a quarter of a century and its first in five years, as the normal January slowdown in exports and a rising oil bill combined to reverse a Y914bn surplus in December into a Y349bn deficit."
Well so far so good, this is what theory would seem to predict. Of course there are any number of one-off issue in play:
Economists said the latest number was not a cause for concern since exports normally fell in January because of the long new year’s holiday in Japan, which caused a slowdown in production and shipments.
but then there is this:
Higher imports partly reflected rising domestic demand, as well as the surge in oil prices....Hiroshi Shiraishi, economist at Lehman Brothers, said that, as domestic demand picked up, it was natural — and positive — that the economy would become less dependent on exports. “Going forward, we don’t expect net exports to provide a big boost to gross domestic product,”
Oh, oh.
In the fourth quarter, which showed annualised gross domestic product growth of 5.5 per cent in real terms, domestic demand outpaced net exports as a contributing factor, underlying the self-sustaining nature of Japan’s recovery.
Mr Shiraishi said the volume of imports had picked up 7 per cent in January as Japanese demand for foreign products increased. In yen terms, imports rose 27 per cent to Y5,360bn, spurred by a 67 per cent rise in the oil bill over the previous January.
Morgan Stanley's Takehiro Sato tries to be re-assuring:
"Takehiro Sato, economist at Morgan Stanley, said it was unwise to read too much into one month’s numbers. Weak exports to Asia probably owned to special factors, particularly the Chinese new year, part of which fell in January this year, he said."
He may be right, but then when theory and empirics coincide in this way there is food not for worry, but for thought. Maybe what we are all about to do is an exercise in ordinary language philosophy: checking out what the word 'sustainable' actual means in the day-to-day context.
Monday, February 20, 2006
Japan Back With The Leaders?
The FT's David Turner had this incredible article in the FT over the weekend (behind the great firewall I'm afraid):
Growth puts Japan back with the leaders
Unexpectedly strong growth in the last quarter propelled Japan's economy once again into being a world leader, promising an end to 15 years in the doldrums when periodic economic revivals dissolved into false dawns.
The world's second biggest economy grew 1.4 per cent in the fourth quarter – far in excess of the 0.3 per cent growth recorded in the US and growth of 0.4 per cent in the European Union.
Japan's economy once again a world leader? IMHO this is terribly premature and extraordinarily ill-advised. In particular it is clear just how ill advised it is if you read another article in the same newspaper (this time David Pilling):
"The tightening of Japan’s labour market is arguably the single most important sign that the country’s economy, after years of adjusting in the aftermath of the bubble, has finally normalised."
Wrong David, the tightening of Japan's labour market is a sign that Japan is an ageing society, with a shrinking available labour force. This is not a good sign: show me your productivity numbers is what I say. To plagiarise Solow, we can see the crowth everywhere, except in the productivity numbers. Methinks we are in for some rude surprises.
"As a result of increasing job security, consumers, who until recently had been running down their savings to preserve their living standards, have opened their wallets a little further. That has persuaded companies to invest in capital and still more workers to meet what is expected to be steadily growing domestic demand."
Of course what is happening in Japan is a first, something of a great experiment (although there are signs that something similar may be happening in Italy, another society with similar problems). There has been a lot of speculation about just how the fact that the forseeable labour shortage would lead to a 'capital deepening' process as labour became relatively more expensive. Well, labour is becoming relatively more expensive, so now we will get to see how the capital deepening part works out in practice. This will be an interesting test for neo-classical theory.
Here are links to some more, and equally revealing articles in the FT:
Japan 'creating sub-class of poorly paid
Huge changes in Japan's labour market are creating a dangerous divide between well-paid, well-trained workers in permanent employment and a sub-class of poorly paid workers with low skills and fragile job security, the Organisation for Economic Co-operation and Development has warned.
The report, which makes calls to tackle deflation and assert fiscal control, highlighted the downsides of greater labour market flexibility.
Fewer Japanese
The future has arrived slightly quicker than expected in Japan, with the news that last year, for the first time since records started in 1950, the country's male population fell. The decline was fractional, and could be totally attributed to more men moving out of, rather than into, Japan, probably because of company transfers. Nonetheless, this was a demographic outcome waiting to happen because of the country's falling birth rate, which set a record low in population growth of only 0.05 per cent last year. Japanese experts are now predicting that next year will see the first decline in the country's overall population.
The shrinking of the workforce and the swelling number of pensioners is a trend occurring across many developed, and some developing, countries. Indeed, thanks to its one-child policy, China is forecast to see the ratio of working age people to pensioners collapse from more than 6:1 in 2000 to fewer than 2:1 in 2050 as that country ages faster than any other in history.
Growth puts Japan back with the leaders
Unexpectedly strong growth in the last quarter propelled Japan's economy once again into being a world leader, promising an end to 15 years in the doldrums when periodic economic revivals dissolved into false dawns.
The world's second biggest economy grew 1.4 per cent in the fourth quarter – far in excess of the 0.3 per cent growth recorded in the US and growth of 0.4 per cent in the European Union.
Japan's economy once again a world leader? IMHO this is terribly premature and extraordinarily ill-advised. In particular it is clear just how ill advised it is if you read another article in the same newspaper (this time David Pilling):
"The tightening of Japan’s labour market is arguably the single most important sign that the country’s economy, after years of adjusting in the aftermath of the bubble, has finally normalised."
Wrong David, the tightening of Japan's labour market is a sign that Japan is an ageing society, with a shrinking available labour force. This is not a good sign: show me your productivity numbers is what I say. To plagiarise Solow, we can see the crowth everywhere, except in the productivity numbers. Methinks we are in for some rude surprises.
"As a result of increasing job security, consumers, who until recently had been running down their savings to preserve their living standards, have opened their wallets a little further. That has persuaded companies to invest in capital and still more workers to meet what is expected to be steadily growing domestic demand."
Of course what is happening in Japan is a first, something of a great experiment (although there are signs that something similar may be happening in Italy, another society with similar problems). There has been a lot of speculation about just how the fact that the forseeable labour shortage would lead to a 'capital deepening' process as labour became relatively more expensive. Well, labour is becoming relatively more expensive, so now we will get to see how the capital deepening part works out in practice. This will be an interesting test for neo-classical theory.
Here are links to some more, and equally revealing articles in the FT:
Japan 'creating sub-class of poorly paid
Huge changes in Japan's labour market are creating a dangerous divide between well-paid, well-trained workers in permanent employment and a sub-class of poorly paid workers with low skills and fragile job security, the Organisation for Economic Co-operation and Development has warned.
The report, which makes calls to tackle deflation and assert fiscal control, highlighted the downsides of greater labour market flexibility.
Fewer Japanese
The future has arrived slightly quicker than expected in Japan, with the news that last year, for the first time since records started in 1950, the country's male population fell. The decline was fractional, and could be totally attributed to more men moving out of, rather than into, Japan, probably because of company transfers. Nonetheless, this was a demographic outcome waiting to happen because of the country's falling birth rate, which set a record low in population growth of only 0.05 per cent last year. Japanese experts are now predicting that next year will see the first decline in the country's overall population.
The shrinking of the workforce and the swelling number of pensioners is a trend occurring across many developed, and some developing, countries. Indeed, thanks to its one-child policy, China is forecast to see the ratio of working age people to pensioners collapse from more than 6:1 in 2000 to fewer than 2:1 in 2050 as that country ages faster than any other in history.
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