Japan's energy dependency

A key quote from the Bloomberg article that Edward referenced in the previous post is the statement that "rising food and energy prices are eating into the cost of living." While the USA's dependence on foreign oil is frequently discussed in mainstream media, it is important to remember that Japan is even more dependent on foreign supplies of essentially all fuels; whether it be oil, natural gas, or uranium for the country's nuclear power plants.

The country's export manufacturers can to some degree pass on higher energy costs to buyers, particularly since the yen remains weak and energy makes up a relatively low fraction of the final cost of most manufactured exports. The consumer in Japan, on the other hand, has little alternative. Many, many homes in Japan still rely on kerosene fuel for heating, and are poorly insulated, with the potential for conversion to another source of heating such as electrical systems being minimal. So the fuel bill will reduce the consumer's cash available for discretionary spending.

Also, the Japanese agricultural sector is heavily subsidized, and inefficient compared to other countries. A drive through rural parts of Japan will reveal many small plots of rice fields. The retail price of a bag of rice at Japanese supermarkets is far above that of the same quantity in the US, and likely the same in relation to other countries. A policy that could be implemented in short order that would benefit Japanese consumers immensely would be to eliminate import restrictions on foreign agricultural products, particularly rice. Food prices in Japan would quickly drop radically, freeing up disposable cash.

This policy option is unlikely to be implemented, as the balance of power in the Japanese legislature lies with agricultural and rural interests who would obviously suffer as the result of such a policy. Although Japan's population obviously is highly urbanized; due to the way that their political systems are set up, seats in the legislature have not been reapportioned to reflect demographic changes. I highly recommend Karel van Wolferen's "The Enigma of Japanese Power" for an explanation of Japan's political system. While somewhat dated at this point, the book gives the reader a lot of insight into how the country's political system works.

In particular, the book illustrates how Japan's economic policy has been to subsidize export industries at the expense of the domestic consumer. The continuing weakness of Japan's domestic consumption is a case, so to speak, of the chickens coming home to roost. The country's policy makers at this point have little ability to shift this policy, as reduced exports would negatively effect GDP more quickly than the benefit to domestic consumption would appear, particularly given the prospects for a rapidly shrinking population.

Consumer Confidence on the Slide

According to Bloomberg this morning:

Japan's consumers were the most pessimistic in more than two years last month as higher taxes, falling wages and lost pension records chipped away at people's confidence in the economy. An index that measures confidence among households with two or more people dropped to 45 in June from 47.3 in May, the Cabinet Office said today in Tokyo. Sentiment was the lowest since it fell to 44 in December 2004.

Wages have fallen every month so far this year, and rising food and energy prices are eating into the cost of living.

Confidence among consumers including single-person households slumped to 45.2 from 47.4, also the lowest since December 2004. That survey has only been available since 2004.

Japan has struggled to emerge from a bout of deflation that has plagued the economy since the 1990s. Companies are gradually raising prices to reflect higher costs as the economy expands, stoking inflationary pressure, said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. in Tokyo.

Wages have failed to grow so far this year, even with unemployment at a nine-year low and companies reporting labor shortages. Average pay only rose 0.3 percent, or 10,000 yen ($82), in 2006, after sliding 10 percent in the decade before that.

Well. I think all of this just about confirms what Claus, Scott and I have been saying on this blog for some considerable time now. The big news is that maybe the mainstream discourse is now about to pick up on the underlying reality:

As Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo, says:

``Consumer spending probably won't become the main driver of the economy anytime soon....You can't expect consumer sentiment to rise while wages are falling and taxes and prices are increasing.''

Machinery Orders and the Economy Watchers Index

Data coming out of Japan at the moment is really mixed at the moment. Really, as Claus Vistesen notes here, we are all busily holding our breath right now.

The latest news on the machinery orders front seems, on the face of it, quite positive on the surface:

Japan's machinery orders, a key indicator of corporate spending plans, rose at triple the pace economists predicted, reinforcing expectations the central bank will raise interest rates as soon as next month.

Orders climbed a seasonally adjusted 5.9 percent in May from the previous month, the Cabinet Office said in Tokyo today, a second monthly gain.

Manufacturing equipment orders rose at the fastest pace in almost a year, led by electrical machinery, transportation and textiles industries, signaling industrial production is likely to recover.

On the other hand industrial production, as Bloomberg also note, has been on a downward trend of late. Evidently we are in "wait and see" mode.

Meanwhile the Economy Watchers index has come in with a quite negative reading for domestic demand. The index, which gauges the strength of domestic demand via a survey of about 2,000 people who deal directly with consumers, fell to 46 points in June, a third monthly decline, the Cabinet Office said today in Tokyo. According to Bloomberg:

Slumping wages, higher taxes and concern over lost pension benefits may hobble consumers, whose spending makes up more than half of the economy. Japan's longest postwar expansion has been driven by business investment and exports of cars and electronics.

Wages have failed to grow so far this year, even with unemployment at a nine-year low. Average pay only rose 0.3 percent in 2006, after falling 10 percent between 1997 and 2005.

Last month's final rollback of tax rebates instituted by former Prime Minister Junichiro Koizumi will add about 14,000 yen ($110) to the average tax bill for a family of four. The Social Insurance Agency said in May that the mishandling of pension records could result in billions of yen in unpaid benefits.

Prospects for consumer spending may deteriorate in coming months, today's survey showed. The outlook index, a measure of expectations for the next two to three months, fell to 48.4 in June, below the optimism threshold of 50 for the first time this year, the Cabinet Office said.

Household spending rose 0.4 percent in May, the slowest gain so far this year.

What all this means is that the outlook on the upward blip in domestic consumption may now, once more, be headed south.So we have a two tier Japan economy right now, a domestic Japan, which really struggles to move forward, and an export sector which, for the time being, continues to March from strength to strength. At least this is how it all looks on the surface.

Savvy Housewives and Mum and Pop Investors

This time Bloomberg has a new angle on all this:

Yen sales by Japanese mom and pop investors this week exceeded professional traders' bets against the currency on the Chicago Mercantile Exchange.

Net short positions on the yen against the dollar, or wagers Japan's currency will fall, reached $1.1 billion among traders using borrowed funds on July 4, according to Tokyo Financial Exchange. Based on estimates of the exchange's market share, the total position of Japanese individual investors is about $19.15 billion, compared with a record $19.07 billion of bets by traders on Chicago's market.

This comparison gives a measure of the scale of what is happening. As they say:

Japanese pensioners, businessmen and housewives are taking advantage of the Bank of Japan's 0.5 percent benchmark rate to borrow yen to buy higher-yielding currencies in New Zealand, the U.K. and Australia. The growing popularity of so-called carry trades has added to declines in the yen, which dropped against all of the 16 most-active currencies in the past year.

and there is more to come:

``The yen will fall further due to the growing presence of those Japanese retail investors,'' said Toru Umemoto, chief currency strategist at Barclays Capital in Tokyo. ``Those mom- and-pop investors have invested only 3 percent of their total financial holdings of 1,500 trillion yen in overseas assets. They will invest more.''

In Japan, individuals have opened 664,802 margin trading accounts at brokerages that lend money for currency bets, almost double a year ago, according to Tokyo-based Yano Research Institute Ltd., publisher of an annual report on the business. The number may exceed 1 million by the end of March, said Kaz Shirakura, senior researcher at the institute.

``The arrival of Japanese households as major investors seems to have affected foreign-exchange markets,'' Nishimura, 54, said in a speech at a meeting at the Brookings Institute in Washington on July 2. ``The gnomes of Zurich were accused in their day of destabilizing markets. The housewives of Tokyo are apparently acting to stabilize them.''