Dooming and Glooming about Japan

And now for something completely different, a guest post from Danish Blogger Claus Vistesen:

Dooming and Glooming about Japan ... Is it too much?

It has been a while since I have reported on the excellent writings of the Economist's weekly column Buttonwood about economic and financial markets. And before we get into the actual topic I would like to offer my humble advice to the editors of the Economist's website and Buttonwood herself. Consequently, it is beyond me why The Buttonwood Column has not, a long time ago, been structured as a blog with permalinks to entries, entries archived chronologically, trackback features, categories, a blogroll, a decent commentary option (the one now is useless) and a unique RSS feed (does it have that?). I mean you could make these changes in an afternoon (or perhaps two :)) and the attention towards Buttonwood would increase more than ten-fold. The column would instantly get a prominent place on Alpha.Sources' blogroll as well as a welcome post although I am quite sure that its entry into the econ-sphere would be appreciated by all of us. End of rant ...

Now let us move on to the actual content of the Buttonwood column as it was updated last (8th of August) (Walled for non-subscribers). In this column Buttonwood takes on the Japanese economy and gives a vivid and precise description of two discourses; optimists and pessimists concerning the recovery of the previously deflation crippled economy. Regular readers of Alpha.Sources will know that I am (still) amongst the latter and since Buttonwood, at least reluctantly, places herself in the optimist camp there should be ground for an interesting exchange here.

'Quite a few such people [pessimists narrated as Western Money managers by Buttonwood] have been populating the lobbies of Tokyo's lusher hotels this summer, venting their spleen about Japan's economic prospects in a way that strikes local boosters, such as this columnist, as the grossest of ill-manners in a country where these things matter.'

And the bottom line of the pessimists;

'The naysayers point out that the blistering (for Japan) pace of economic growth has probably slowed sharply from its rate of more than 3% earlier this year, thanks to a slowdown in export growth, a destocking of inventories and cuts in public spending. Japan's economic fundamentals, they argue, are weakening, notably in business investment, the area that has until now generated the most excitement about Japan's recovery.'

Moving on the optimists;

'The boosters affect not to be too concerned about that. After all, the outlook for capital expenditure is bright, as reflected in the Bank of Japan's latest Tankan survey of business conditions, published last month. It shows growing optimism among companies, particularly large ones, which plan to boost capital expenditure by 12% in the fiscal year that began in April. What is more, non-manufacturing companies also feel confident enough now to invest.'

Now before we move on it is clear that what we need to really talk about here is the nature of Japan's recent growing growth rates. The quotes above implie that the growth has, to a large degree, been driven by exports which again means that in order for the recovery to be sustainable domestic demand has to pick up to at least some degree in order to carry the positive spiral on. And this is exactly where we need to be cautios I think ... Following Buttonwood further we find that this is also what distinguishes the optimists from the pessimists ...

Besides, boosters expect consumption to take up the running from investment as the main driver of domestic demand—just as business investment earlier in the four-year-old recovery took over from exports. Here, the naysayers, in their pinched fashion, point out that little sign of this recovery in consumption is apparent yet. Data collected by government surveys of households show that both consumption and disposable income were falling in recent quarters. Shops report sluggish or negative growth. Car sales are falling.

Buttonwood stands firm though ...

'This columnist attempts to gather his composure. Yes, consumption is patchy, but that's not the whole picture. As far as jobs are concerned, the outlook is bright. Labour markets in many parts of the island chain are tight and companies expect to do more hiring. As Mr Feldman points out, the number actually in work has been stable since mid-2003, despite a fall in the working-age population. This suggests that workers who dropped out of the labour force during the long slump have been keen to rejoin it'

So where is the Japanese consumtion patterns going and more importantly, will there enough and sustainable domestic demand to support the recovery and future growth? This seems to be the question does it not and although I cannot by no means give the answer it seems prudent to at least exhibit caution when we, after all, are talking about the world's oldest population with a TFR well below replacement level. In short; there might other reasons why labour markets are tightening. It definitely seems as if Japan has escaped deflation (for now) and this is good because this means a growing economy. In the end I do not want to be the wiser here because my argument drawn from the demographics of Japan has long term implications none of us can predict. Japan is certainly now in a much more virtuos circle than before where it was held back by the claws and fangs of deflation and this is good but I do not think we should expect a Tiger's roar from Japan; more like a faint miauww perhaps?

The Japanese Labour Force

The Japanese labour force has risen for the first time in eight years as women and those over 60 are drawn back to the jobs market in a sign of the strength of Japan’s cyclical recovery, now in its fifth year.

The willingness of those who left the jobs market to re-enter also shows the mechanisms by which the labour market might respond to the challenges of an ageing society, which is shrinking the size of the traditional workforce.

An analysis in Monday’s Nikkei newspaper found that Japan’s labour force, comprising those in jobs as well as those seeking work, rose by 150,000 to 66.54m in the year to April.

Separate data released on Monday by the labour ministry showed the total number or regular employees rose 0.6 per cent in March from a year earlier, with full-timers up 0.6 per cent, outpacing the rise in part-timers, up 0.3 per cent.

Part of the explanation is that people discouraged from looking for work have come back to the labour market amid brighter job prospects, say labour economists.

Recent surveys show that after years of excess labour capacity there are now more jobs available than job-seekers to fill them. Earlier this year, the ratio rose to 104 jobs per 100 applicants, though it has since slipped back marginally.

According to official figures, the number of women in the labour force has risen 220,000 in the past three years to 27.52m. By last year, there were also 9.67m people aged 60 or over either working or looking for work, a 450,000 increase from five years earlier.

Until 2000, the official retirement age was 60, but this is now being raised incrementally to 65 by 2013.

The Bank of Japan has been carefully monitoring the labour market which it views as a vital component in ensuring sustainable growth. Bank officials say every business sector is now suffering from labour shortages, which could push up wages and lead to further hiring of people who had drifted out of the labour market.

Many companies, the BoJ said in its recent six-monthly outlook report, are “experiencing constraints arising from insufficient labour”, the strongest in more than a decade.

Richard Jerram, economist at Macquarie Securities, said the rise in workers was a cyclical improvement and did not mean Japan could buck its long-term demographics.

Japan’s baby-boom generation is expected to start retiring on mass from next year.

That could see a resumption of a fall in the workforce, which had been declining at about 0.6 per cent a year, economists say.

In 2004, the number of men aged between 17 and 64 fell by 170,000. About a fifth of Japan’s population, which began to shrink overall last year, is aged over 65.

Atsushi Seike, a labour economist at Keio university, said the workforce was bound to get older as people lived longer and as changing pension rules forced people to delay their retirement longer.

However, this did not mean Japan’s unemployment rate, now 4.1 per cent, would return to previous levels. In 1992, he said, when the labour market was last as tight as now, unemployment was 2.2 per cent.

Older workers and part-time workers – the latter category of now accounts for a third of workers – spent longer between jobs than full-time younger workers, he said, pushing up the “structural unemployment rate”.

Japan A Suitable Place For Children?

The Japanese newspaper Asahi this weekend published the results of a survey carried out on behalf of the Japenese cabinet office into attitudes towards having children in Japan, South Korea, France, Sweden and the US.

Whereas in Europe and the United States respondents tended to indicate they expected to have all the children they wanted, of those Japanese interviewed who said that they want to have more children, 53.1 percent said they do not plan to do so. More than half of the South Koreans said the same.

When asked whether they considered Japan a suitable place to bear and raise children, 50.3 percent of the Japanese respondents completely or somewhat disagreed. In South Korea, 79.8 percent said their country is unsuitable for raising children. In contrast, 97.7 percent of Swedes said their country is suitable, while the figures were 78.2 percent in the United States and 68 percent in France.

These results whilst not conclusive about anything do put me in mind of Wolfgang Lutz's fertility trap hypothesis. Basically the idea here would be that once low fertility has continued for a significant time (low fertility is defined by Lutz as below 1.5TFR, and Japan has now been below the 2.1TFR replacement level for several decades) it may be hard to raise the expectations of people about the number of children they are likely to have, especially if economic conditions at the same time exert pressure on your capacity to do so. Japan would therefore be a classic case of such a possibility. The latter point seems to be reinforced by the latest findings in another Asahi survey, which suggested many people in Japan seem to feel that their living standards have deteriorated during the Koizumi era.

Forty-two percent of those responding to an Asahi newspaper survey said their livelihoods deteriorated under the leadership of Prime Minister Junichiro Koizumi. Just 18 percent said they are now better off.....

Japan is just beginning to consider the social costs of some of Koizumi's policies. During his tenure, the government has trimmed pension and health benefits. Among other changes, inheritance tax laws were altered to simplify the transfer of large assets, and capital-gains taxes were lowered......

At the same time, Koizumi hasn't matched Japan's debt sales with the kinds of tax cuts that might benefit the broader economy. Japan doesn't need to make rich people who invest in stocks or real estate even richer; what it needs is babies.

Because of a low birthrate of 1.26 children per woman, Japan's population actually shrank in 2005. If you are going to cut taxes, why not do it for young families to boost the nation's birthrate? Without a significant increase in the number of births, Japan may never get out from under its debt load. Its debt-to- gross-domestic-product ratio is about 151 percent, the highest among developed nations.

Mild Deflation Persists

The yen fell yesterday against the dollar after Chief Cabinet Secretary Shinzo Abe and internal affairs minister Heizo Takenaka both stated that mild deflation persists in Japan. Commentators are speculating that the government may be just trying to delay an earlier end of the BOJ's zero-rates policy, but accept that there is some truth the pace and degree of the forceast increase in prices is still slow (the BOJ forecast in its last semi-annual report that Japan's consumer prices will rise for the next two years and the economy will keep expanding).

he yen dropped to 114.20 per dollar as of 7:33 a.m. in London from 114.11 late yesterday in New York, when it reached 113.84, the strongest since Jan. 16. It traded at 143.19 versus the euro from 143. It will move between 113 and 116 yen next week, Saito said. The dollar was at $1.2553 per euro from $1.2534 after yesterday reaching the lowest since Sept. 5.

Japan's core consumer prices, which exclude food, gained 0.5 percent in March from a year before, the statistics bureau said in Tokyo today, below the median forecast for a 0.6 percent increase. Prices gained for a fifth month and rose 0.1 percent in the year ended March 31, the first gain in seven years.

Abe told reporters at a regular press conference in Tokyo today the government would need to watch price trends to determine whether they are sustainable. Takenaka said the Japanese economy is still in mild deflation.

`Sentiment is Shifting'

The yen is still heading for its best week against the dollar since mid-March after the G-7 called for faster regional currency appreciation and a Japanese government report showed economic growth continues to pick up.

The currency has risen 1.9 percent this week after G-7 officials April 21 said it's ``critical'' for Asian countries, especially China, to allow currency gains to ease a reliance on exports to fuel growth.

``Sentiment is shifting toward yen-bullishness,'' said Akifumi Uchida, a deputy general manager of financial markets at Sumitomo Trust & Banking Co. Ltd. in Tokyo. He said the yen may rise to 113.50 against the dollar today.

Japan's industrial production rose as manufacturers increased output in anticipation of higher domestic and overseas demand. Production climbed a seasonally adjusted 0.2 percent in March, the first gain in three months, the trade ministry said in Tokyo today. The result exceeded the 0.1 median forecast of 39 economists surveyed by Bloomberg News.

`Essentially Hawkish'

Japan's central bank March 9 ended a five-year policy of pumping money into the economy. It kept rates close to zero percent at a meeting today, judging five months of rising consumer prices as insufficient to justify raising borrowing costs for the first time in more than five years.

The BOJ's forecasts indicate the central bank considers Japan's economy, after three recessions since 1991, is becoming resilient enough to withstand higher borrowing costs.

``It still looks like the first rate hike is months away, but the BOJ looks to be signaling its intention to move this year,'' said Adrian Foster, a currency strategist at Dresdner Kleinwort Wasserstein. ``History of these watershed policy shifts in Asia is that the policy makers move earlier than the market expects.''

Dresdner forecasts the yen to rise to 112 per dollar in six months and to 105 yen by year-end, Foster said.

Misread the Statement

The U.S. currency also strengthened today after Federal Reserve Chairman Ben S. Bernanke and Hiroshi Watanabe, Japan's vice finance minister for international affairs, yesterday both said investors misunderstood the G7 statement if they believed it called for the dollar's decline.

The statement ``didn't say that a depreciation in the dollar is needed,'' Watanabe said in Tokyo. ``Gains in the yen and euro signal that the market has misread the G-7 statement.''

Japanese officials may be concerned a stronger yen will hurt the country's exports and delay the world's second-biggest economy emerging from deflation.

``The Japanese make these kind of remarks whenever the yen strengthens,'' said Mitsuo Imaizumi, a deputy general manager of fixed-income sales and marketing at Daiwa Securities SMBC Co., a subsidiary of Daiwa Securities Group Inc., Japan's second- largest brokerage. The yen will move between 113.80 and 114.60 against the dollar today, he said.

``The G7 supports a market determined dollar, not a managed dollar,'' Bernanke said. Reports that the G7 discussed a managed depreciation of the dollar were ``not correct,'' he said.

``He's concerned that a dollar decline may heighten inflation expectations,'' Imaizumi said.