Koji Omi, Japan's finance minister, claimed yesterday that the gross domestic product deflator - an important measure of deflation - would turn positive in the year to March 2008 for the first time in a decade:
“The GDP deflator for the current fiscal year was minus 0.4 per cent, and that will become plus 0.2 per cent in fiscal 2007/08,” he said. “That shows the economy will become normal.”
Not everyone is completely convinced however:
Robert Feldman, economist at Morgan Stanley, said the disappearance of deflation as measured by the GDP deflator would be an important moment if it came true. However, he said that five years of economic growth were feeding through more slowly than expected into inflationary pressure.
This is just the point. As I have been arguing, consumer demand is proving to be much weaker than might have been expected, and this is raising doubts whether Japan can, finally, escape deflation.
Inflation has yet top break the 1% mark, and the yen is running still at historic lows against the euro, and is fairly weak against the dollar, both circumstances which are likely to be inflation positive.
At the same time Prime Minister Shinzo Abe seems determined to try to move forward to address the government debt situation, so that may well help explain the reluctance, commented on yesterday, of the BoJ to raise interest rates.
In fact the cuts they are looking at are no mere trifle:
Japan's government may eliminate its budget deficit earlier than the target date of 2011, Finance Minister Koji Omi said, confirming Prime Minister Shinzo Abe's commitment to cutting the world's largest public debt.
``If we just persist a little longer we may even be able to come in ahead of schedule,'' Omi said today in Tokyo after his ministry proposed reducing new bond sales by a record and curbing spending on public works in the year starting April 1.
The so-called primary deficit, the gap between revenue without new bond sales and annual spending excluding interest payment on debt, will decline to 4.4 trillion yen in fiscal 2007 from 11.2 trillion yen this year, improving for a fourth year. The government in July said it wants to eliminate the primary deficit by 2011 to stop the public debt from expanding.
So they would be aiming to make 7 trillion yen of savings in one fiscal year. Since this saving is only to come from a reduction in borrowing, and since interest rates are still only at 0.25% (and thus could not be claimed to have been excessively driven up by government borrowing), it is hard to see where the uptick in demand is going to come from to compensate for the cuts.
So it is hard to see the BoJ being especially vigorous with trying to raise rates, and it is hard to see where the inflationary pressure they are going to need to get themselves out of the mire of deflation is actually going to come from.
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, December 20, 2006
Tuesday, December 19, 2006
No Change At The Bank of Japan
Unsurprisingly, the Bank of Japan kept interest rates unchanged yesterday.The decision was unanimous. . Obviously that now opens the question as to whether they will in fact ever (in the short run I mean) be able to get round to raising. It depends on the external environment, and how much exporting they will be able to do in Q1 2007, I guess. But still they won't be going very far.
Bonds rose and the yen fell after Fukui said the bank wants to check more statistics on consumer spending and prices, which he described as ``somewhat weak.'' The bank isn't under pressure to raise rates because the economy, while in its longest expansion since World War II, grew at the slowest pace in almost two years last quarter.
``Fukui admitted that the some sectors of the economy, such as spending, are weak,'' said Hitomi Kimura, a bond strategist in Tokyo at JPMorgan Securities Japan Co. ``Such comments reduced expectations for higher rates.''
The yield on the benchmark 10-year bond fell 5 basis points to 1.63 percent at 5:54 p.m. in Tokyo. The yen declined to 118.12 per dollar from 117.92 before the announcement the key lending rate would be unchanged.
Tankan Report
The yen had its biggest drop in four months last week as reports, including the Tankan survey of business confidence, failed to provide enough evidence that the economy is accelerating.
The Tankan survey released last week showed confidence among large manufacturers rose to a two-year high and companies increased their forecasts for spending, profit and sales. They also said production capacity was the tightest since 1991 amid the most severe labor shortages in 14 years.
That survey wasn't enough to allay concern that the economy is slowing that followed the third-quarter gross domestic product report. The economy grew at an annual 0.8 percent pace in the period, less than half the government's initial estimate, as consumer spending slumped.
Meantime Cluas Vistesen has another timely post digging a bit deeper into the Japan phenomenon.
Bonds rose and the yen fell after Fukui said the bank wants to check more statistics on consumer spending and prices, which he described as ``somewhat weak.'' The bank isn't under pressure to raise rates because the economy, while in its longest expansion since World War II, grew at the slowest pace in almost two years last quarter.
``Fukui admitted that the some sectors of the economy, such as spending, are weak,'' said Hitomi Kimura, a bond strategist in Tokyo at JPMorgan Securities Japan Co. ``Such comments reduced expectations for higher rates.''
The yield on the benchmark 10-year bond fell 5 basis points to 1.63 percent at 5:54 p.m. in Tokyo. The yen declined to 118.12 per dollar from 117.92 before the announcement the key lending rate would be unchanged.
Tankan Report
The yen had its biggest drop in four months last week as reports, including the Tankan survey of business confidence, failed to provide enough evidence that the economy is accelerating.
The Tankan survey released last week showed confidence among large manufacturers rose to a two-year high and companies increased their forecasts for spending, profit and sales. They also said production capacity was the tightest since 1991 amid the most severe labor shortages in 14 years.
That survey wasn't enough to allay concern that the economy is slowing that followed the third-quarter gross domestic product report. The economy grew at an annual 0.8 percent pace in the period, less than half the government's initial estimate, as consumer spending slumped.
Meantime Cluas Vistesen has another timely post digging a bit deeper into the Japan phenomenon.
Adjusting the Views on Japan?
(Cross-post from Alpha.Sources)
In my comments on Japan here at AS I have consistently advocated a rather pessimist discourse on the economy primarily driven by my belief that the economy is in a structural bind with a continuing downward trend in consumer spending regardless of the how well the corporate sector (i.e. the export sector) fairs. In short, I do not see Japan returning to a balanced growth path anytime soon (neo-classical growth proponents, take note!) and my analysis fundamentally hinges on the strong life-cycle component of the domestic consumption trend or put in another words; demography matters here!
Apart from my personal stubborn and persistently pessimistic position on Japan I also in all fairness have to point the data which has done nothing but support mine (and other's) narrative on Japan. Specifically, I am talking in a large (about 1 year) perspective. Consequently, it is sometimes nice to step back and look what has actually happened since Japan chose to end ZIRP back in the late spring this year. Back then, the move by the BOJ was widely seen as one of many steps in a long consistent process to mop up excess liquidity and normalize Japan interest rates, Japan was back amongst the leaders! Clearly, this has not been the case and one of the most striking features about Japan in the moment is how the BOJ just cant seem to find the economic justification to begin to turn off the money tap. Meanwhile, some of the most brilliant economic commentators still argue that it is only a matter of time before we see the much allured spill-over effect from the sparkly corporate sector to domestic consumption, that is the transition to a balanced growth path. We only need to wait. All this is of course being printed along side an inflation rate which is still flirting dangerously with the 0% mark and thus negative range and this has many thinking overtime because why is inflation so low in the light of a tightening labour market for example? Some indeed has come along way in seeing this correctly, and now also the big guns (i.e Morgan Stanley again) is also at least opening a backdoor as a hedge against the traditional positive stance ...
What we outline here is a risk scenario, not our main one. Nevertheless, we do not think it is a low-probability scenario, considering that the latest reading on price growth is very low, at just 0.1% YoY. In light of oil price trends, the Japan-style core CPI could contract again YoY in 2007 H1, contrary to our constructive economic outlook.
(...)
The recent, substantial, retroactive GDP revisions [see also here] confirm the weakness in the core of core CPI. For the F2006 national accounts, real GDP was revised downward by 0.9 ppt to 2.4%, which should have more than a negligible impact on estimates of the output gap since the economy’s potential growth rate is just shy of 2% at best. Based on the revised GDP data, the pace of the contraction in the output gap in F2006 declines by almost 1 ppt. If the improvement in the output gap is only modest, the spillover effect on prices would naturally be that much weaker.
Also please take note of this ... the return to ZIRP is not a fairytale but a distinct possibility.
If the Japan-style core turns negative several months after the next rate hike, it would be easy to imagine the BoJ being in a politically difficult situation in terms of putting a crimp in the Cabinet/ruling coalition’s pro-growth policies. Governor Fukui would not likely have to resign, but the choice of his successor after his term ends in March 2008 could be affected to some extent. To be more specific, Deputy Governor Toshiro Muto, who is currently widely expected to be the next governor, may be less likely to be promoted and the government and the ruling coalition may instead look for a candidate outside the BoJ
(...)
If someone with a strong monetarist bent is named to be the next governor, Japan could be stuck in an ultra-low rate environment for a long time, with price growth hovering very low. If policy is focused on an increase in money supply, the BoJ may increase the supply of reserve deposits and put the policy rate back to near 0%.
I think the key words for reading the Japanese economy at the moment is a bit of open mindedness in terms of what we could call the traditional/text book macroeconomic convictions. It should be quite clear for regular readers that I believe demography is a key determinant here. However, this does not mean that demography is the holy grail which can be applied universally to all macroeconomic issues. But in the case of Japan, the demographic economic analysis which is clearly an analytical field in development represents a very strong theoretical anchor for understanding what is going on; at least I believe this should be clear by now.
Sunday, December 17, 2006
Japanese Growth Revisited
This article on the recent downward revision of Japanese growth is a bit old now, but it does contain a few useful points:
Japan's economy grew at a far weaker pace in the third quarter than previously reported due to downward revisions in consumer spending and capital investment, the government said Friday, raising concerns about the recovery's strength. Gross domestic product expanded at an annual rate of 0.8 percent, well below the preliminary 2.0 percent announced in November, but marked the seventh straight quarter of expansion, the government said.
Since exports remained relatively strong, the big changes were a revision downwards of consumption and investment:
Domestic demand — which includes consumer spending, government spending and private investment — had contracted 0.2 percent from the previous quarter instead of inching up 0.1 percent, as previously thought.
Separately government data viewed as a key indicator for corporate investment, released Friday, showed core machinery orders rose a weaker-than-expected 2.8 percent in October from the previous month. That reversed September's 7.4 percent plunge but missed the forecasts by economists surveyed by Dow Jones Newswires for 5.7 percent growth.
The key to the picture would seem to be consumption, since the weak investment most likely is a by-product of an equally weak estimate of the likely direction of internal consumption:
Economy Minister Hiroko Ota blamed the downward
GDP revision mostly on weak consumer spending, but assured the public that Japan's economic revival was on track.
"The lower GDP was mainly caused by weak consumption," she said. "I don't have any concerns that the economy will fall into a downward trend. Nor do I see any signs of its entering a lull."
Although Japan's economy has been emerging from decade-long slowdown that ran through much of the 1990s, recent signs have underlined the risk that growth may be overly reliant on exports. Some analysts say the revival is dependent on U.S. and other overseas economies holding up.
Analysts also say paychecks and other realities that trickle down to workers don't reflect upbeat GDP numbers, as companies cut costs to keep up with global competition and the Japanese population ages and increasingly shifts to lower-paying jobs.
This weak consumption in Japan meme now seems to be catching on, as this article on the world economic outlook from AP this weekend seems to have already internalised the idea that Japanese consumption is the current big enigma:
Japan, Asia's largest economy, is steadily recovering from a decade of stagnation. However, consumer spending appears to be weakening, leaving the economy vulnerable to slowing demand for exports, its traditional source of growth.
Anyone interested in a fuller theoretical explanation as to why consumption is holding so weak could do worse than this post of mine, or this post from Claus Vistesen.
Japan's economy grew at a far weaker pace in the third quarter than previously reported due to downward revisions in consumer spending and capital investment, the government said Friday, raising concerns about the recovery's strength. Gross domestic product expanded at an annual rate of 0.8 percent, well below the preliminary 2.0 percent announced in November, but marked the seventh straight quarter of expansion, the government said.
Since exports remained relatively strong, the big changes were a revision downwards of consumption and investment:
Domestic demand — which includes consumer spending, government spending and private investment — had contracted 0.2 percent from the previous quarter instead of inching up 0.1 percent, as previously thought.
Separately government data viewed as a key indicator for corporate investment, released Friday, showed core machinery orders rose a weaker-than-expected 2.8 percent in October from the previous month. That reversed September's 7.4 percent plunge but missed the forecasts by economists surveyed by Dow Jones Newswires for 5.7 percent growth.
The key to the picture would seem to be consumption, since the weak investment most likely is a by-product of an equally weak estimate of the likely direction of internal consumption:
Economy Minister Hiroko Ota blamed the downward
GDP revision mostly on weak consumer spending, but assured the public that Japan's economic revival was on track.
"The lower GDP was mainly caused by weak consumption," she said. "I don't have any concerns that the economy will fall into a downward trend. Nor do I see any signs of its entering a lull."
Although Japan's economy has been emerging from decade-long slowdown that ran through much of the 1990s, recent signs have underlined the risk that growth may be overly reliant on exports. Some analysts say the revival is dependent on U.S. and other overseas economies holding up.
Analysts also say paychecks and other realities that trickle down to workers don't reflect upbeat GDP numbers, as companies cut costs to keep up with global competition and the Japanese population ages and increasingly shifts to lower-paying jobs.
This weak consumption in Japan meme now seems to be catching on, as this article on the world economic outlook from AP this weekend seems to have already internalised the idea that Japanese consumption is the current big enigma:
Japan, Asia's largest economy, is steadily recovering from a decade of stagnation. However, consumer spending appears to be weakening, leaving the economy vulnerable to slowing demand for exports, its traditional source of growth.
Anyone interested in a fuller theoretical explanation as to why consumption is holding so weak could do worse than this post of mine, or this post from Claus Vistesen.
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