Well, not quite, since they aren't actually thinking of raising interest rates anytime soon, but...... ultra loose monetary policy is over (for the time being). Now we get to see what happens next:
The Bank of Japan on Thursday asserted its independence by ending an unorthodox ultra-loose monetary policy and shifting to a policy of targeting the overnight call rate.
The bank said it would take “a few months” to bring massive levels of liquidity back down to levels consistent with keeping overnight rates at zero.
The shift ends five years of quantitative easing brought in to save the economy from falling into a deflationary spiral and to help prop up the bad debt-burdened financial system.
Ending the framework is a declaration that the economy has returned to normal and that, in the bank’s opinion, there is virtually no danger of slipping back into deflation
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?
Thursday, March 09, 2006
Wednesday, March 08, 2006
Japan: D Day Approaching?
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 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.
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.
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