Japan, At Last Some Sense

This article about the extent to which the Japanese treasury is dependent on company profits for income is interesting, but beyond that I'm not sure how to interpret the fact since I am not sufficiently knowledgeable about the Japanese fiscal system.

However, a number of points do stand out. Corporate profits now fund the revenue:

Japanese corporate profit tax receipts are poised to overtake personal income tax contributions for the first time in 18 years, a shift that could influence debate among contenders vying to succeed prime minister Junichiro Koizumi.

Wages seem to be flat:

The figures highlight the strong return to profitability of Japanese companies, which have retained most of their gains without passing them on to workers in the form of higher wages. Although the labour market has become tight - with more jobs than job-seekers - wages have hardly risen, although bonuses have improved.

Consumption taxes are soon set to rise:

The finance ministry wants to rebalance the tax system largely by increasing consumption taxes. A central plank in the prime ministerial campaign platform of Sadakazu Tanigaki, finance minister, is a doubling of the sales tax to 10 per cent.

Although not everyone agrees:

Shinzo Abe, who is likely to win the leadership contest, is influenced by policymakers who argue that raising taxes could damage consumption and harm overall economic activity. His policy is to cut spending and try to increase the government’s tax take through promoting growth.

But funding through growth is just what has been tried and failed, that's why the debt is where it is. This view rings hollow.

Most Lopsided Economy in the G7

And then along comes Andrew Smithers:

Andrew Smithers, an economist at London-based Smithers & Co, has said in a recent report that the swing in corporate profits might need to be reversed in the interests of domestic consumption. He argues that Japan is the most lopsided of the G5 economies - the US, UK, Japan, France and Germany - with the lowest consumption and highest investment ratios; the largest current account surplus and budget deficit; the worst demographics and the lowest interest rates.

“These oddities are almost invariably ignored,” he says. “They illustrate how far the economy is from any likely equilibrium and this conflicts with the conventional wisdom which holds that Japan has corrected the past distortions of its economy and is now set on a path of balanced growth.”

Moreover the household savings rate has been falling steadily: from nearly 12 per cent of GDP in 1997 to just over 2 per cent last year. This is also perplexing, does this mean that, following the Life Cycle Theory people do finally get to dis-save in the end. I have long entertained doubts about this, but household saving in Japan is definitely something to watch. But what this seems to suggest is that after the reforms the Japanese are not only not spending, they aren't even managing to save like they used to.

Crunchtime in Japan?

Here's another guest post from Danish Blogger Claus Vistesen:

Crunchtime in Japan?

Well I have pointed to this several times and most recently as the CPI index was revised bringing Japan dangerously close to the 0% inflation mark amidst talks of business cycles topping and whether the BOJ should indeed raise rates any further. This is of course very unlikely now and the future road for Japan might very well be another period of deflation or at least no-one can rule out this possibility at the current juncture I think.

Now, a revision of the statistics might not be important in itself but let us take a quote from and article in The Economist I used as a source in one of my posts linked above.

'This reshuffling of the statistician's shopping basket has rewritten recent history (see chart). Japan, it now seems, did not escape deflation definitively until July, when the core annual inflation rate reached 0.2% for only the second month in a row. As Richard Jerram, of Macquarie Research in Tokyo, puts it “price pressures today are where the BoJ thought they were six months ago.”'

So Japan is not quite out of the deflation spiral it seems or at least trying hard to get off the mark. On top of this the US is slowing which will be sure to dent Japanese exports. China will probably be able to do some heavy lifting here for a while but the main point here is that Japan lacks the domestic demand structure to carry through a sustainable recovery. Why? well a brief look at the country's demographics is of course quite illuminating here as I have argued several times. Another blogger worth mentioning here is Edward Hugh at Bonobo Land who actually was the one who initially steered me into seing Japan the way I do today ... more or less that is. His latest report on Japan is also very telling of things to come ...

Machine orders in Japan is falling rapidly ...

(quote Bloomberg)

'Japan's machine orders fell the most in almost 20 years, dashing expectations that the central bank will raise interest rates before the end of the year.

Non-government orders excluding shipping and utilities dropped a seasonally adjusted 16.7 percent in July from a month earlier, the largest slide since October 1986, the Cabinet Office said today. Orders from semiconductor, steel and mobile-phone businesses paced the drop.'

(Quote Edward)

This is what we could call a second stage event, and now has all the hallmarks of a classic domino chain, although it still isn't clear how far it will reach (all the way to Shanghai??). I am not at all convinced that investment in the US will take up the slack given what we know about fixed capital investment in China, and given the way capacity in things like machinery and equipment has just been ramped up so much in Germany and Japan. As we can see, in Japan it is fixed capital investment that is being hit first.

So watch out everyone, 2007 could be a very complicated year.

Update on Monday, September 11, 2006 at 10:25PM by CV

The Yen/Euro relationship also tells an important part of the story here ...

(quote Bloomberg - bold parts are my emphasis)

'The yen had its biggest drop against the euro since April on speculation the Bank of Japan will lag behind the European Central Bank in raising interest rates this year.

Japan's currency also slid from a one-month high after a government report showed machinery orders fell the most in almost 20 years in July. ECB Chief Economist Juergen Stark was reported today as saying inflation in the 12 nations sharing the euro will stay above target this year and next.

The drop in machinery orders `` confirmed the market's expectation that the Bank of Japan is likely to raise rates at a very slow pace this year,'' said Kamal Sharma, a currency strategist at Bank of America Corp. in London. ``The yen is likely to remain under pressure.''

(...)

``We'll see widening interest-rate differentials from here,'' said Benedikt Germanier, a currency strategist in Zurich at UBS AG. ``The key for euro-yen are the machinery order numbers which came in weaker.''

Non-government orders excluding shipping and utilities dropped a seasonally adjusted 16.7 percent in July from a month earlier, the largest slide since October 1986, the Cabinet Office said today. The median forecast of 30 economists surveyed by Bloomberg News was for a 5.4 percent decline.'

Japan Machinery Orders Slump

Wow, get this from Bloomberg today:

Japan's Machinery Orders Drop Most in Almost 20 Years

Japan's machine orders fell the most in almost 20 years, dashing expectations that the central bank will raise interest rates before the end of the year.

Non-government orders excluding shipping and utilities dropped a seasonally adjusted 16.7 percent in July from a month earlier, the largest slide since October 1986, the Cabinet Office said today. Orders from semiconductor, steel and mobile-phone businesses paced the drop.

``With risks over the U.S. economy looming large, we don't think the Bank of Japan can raise rates'' before March 31, said Yoshimasa Maruyama, an economist at BNP Paribas Securities in Tokyo. ``While part of the drop is a correction from several months of strong data, this was still a considerable decline.''

Today's drop ``is payback for strong orders in recent months,'' said Itsushi Tachi, director of business statistics at the Cabinet Office. ``The trend is for growth.''

The government forecasts machinery orders will increase 4.9 percent in the quarter ending Sept. 31.

``To reach this target, we need growth of 16 percent in August and September,'' Tachi said.

I will write and post more on this as and when I have some time. For now I would just point out that on both this and the German front I have long forseen what was going to happen and in a certain sense the data is now 'coming home to Daddy', although I can't say that this makes me especially happy: I would prefer to have been wrong.

More fuel on the fire will definitely comes from this news last Friday in the US:

"The Federal Reserve reported Friday that consumer borrowing rose at an annual rate of 2.8 percent in July, down from an increase of 7.3 percent in June."

"The slowdown was led by a sharp deceleration in credit card debt, which rose by just 3.4 percent in July after gains of 13.2 percent in June and 13 percent in May."
Associated Press

This is what we could call a second stage event, and now has all the hallmarks of a classic domino chain, although it still isn't clear how far it will reach (all the way to Shanghai??). I am not at all convinced that investment in the US will take up the slack given what we know about fixed capital investment in China, and given the way capacity in things like machinery and equipment has just been ramped up so much in Germany and Japan. As we can see, in Japan it is fixed capital investment that is being hit first.

So watch out everyone, 2007 could be a very complicated year.

Basically the whole Greenspan/Bernanke hand-over was bungled, they should have had one token pause back in November, then Bernanke wouldn't have had to prove his inflation fighting prowess so, and advance over what seems to have been a bridge too far. (I was in fact arguing this back then on this blog).

Also the central bankers collectively should carry some of the can, if what looks like it might happen actually does, since all this 'inflation fighting' jargon has really been quite stupid. As Rogoff has been arguing, what we really have is a change in the terms of trade.

Yen Up, Yen Down

This one in Bloomberg brought a smile to my face:

Yen Jumps After Mirow Says IMF to Discuss Currency's Weakness

The yen jumped after German Deputy Finance Minister Thomas Mirow said the currency's weakness will be discussed when finance ministers and central bank governors meet in Singapore next week.

``The yen has clearly weakened against the dollar but also against the euro, and in so far this will surely be discussed,'' Mirow told reporters in Berlin today.

``There's growing unease outside Japan about the yen's weakness and government officials will have something to say about it,'' said Carsten Fritsch, a currency strategist at Commerzbank AG in Frankfurt.

The yen advanced to 116.26 against the dollar at 7:15 a.m. in New York, compared with 116.65 late yesterday. It also had its biggest gain against the euro since May, climbing to 148.17 from 149.39. The euro fell to $1.2727 from $1.2806.

Japan's currency has slid 6 percent since reaching 109 per dollar on May 17, the highest since September 2005. It also dropped to a record 150.73 versus the euro on Aug. 31.

Now the 24 hour change isn't that great, but the timing IS impeccable. So you can put two readings on this, either markets reacted anticipating changes, or someone somewhere threw a switch to try and ward-off criticism.

There are sort of wheels-within-wheels here, because of course it was a little strange that the yen should be so low against the euro if the Japanese economy was in the process of powering back into the growth arena.

So again you could read the low yen in a number of ways. It could be a sign that many in Japan don't believe the recovery story, and are hedging just in case, or it could be that the disappearance of deflation is in part produced by a policy of steering the yen downward. Choices to suit all appetites, so take your pick. Mind you, if it was the latter, then that *would* explain it if there had been a little hand reaching out discretely to throw a symbolic switch :).