Projections on Japan's Fiscal Liabilities

According to Bloomberg this morning the Japanese government may well have to set aside a record fraction of the budget just for debt interest payments in the next fiscal year as outstanding bond issuances rise and interest rates increase. According to Japan government officials - who spoke to Bloomberg on condition of anonymity - interest payments on government bonds and debt-redemption costs will probably surge 6 percent to a record 22.2 trillion yen ($192 billion) in the year that starts April 1. IOt is projected that this quantity alone will account for more than a quarter of total government spending.

The exact value to put on the outstanding Japanese is a matter of some controversy, but the budget assumptions it seems project that total will reach a whopping 148 percent of gross domestic product by March.

As Bloomberg note:

Total spending may expand 3 percent to 85.7 trillion yen next year as the aging population swells social-welfare costs and subsidies to local governments expand, according to the budget outlook.The ministry assumes interest rates on debt repayments average 2.9 percent next fiscal year, compared with 2.3 percent in the budget for the current period. It usually assumes higher- than-actual yields in the budget outlook.

No wonder Fukushiro Nukaga is putting pressure on the BoJ not to make any more precipitate interest rate increases.

Japan Retail Sales July 2007

Well, the Japan retail sales numbers (preliminary data) for July are now out, and sales are actually up on June, but down significantly (2.2%) year on year. The Financial Times covers the story here, and Bloomberg here.

As is becoming customary in the traditional media, bad weather is presented as the principal culprit:

The value of retail sales was 2.2 per cent lower in July than a year before – the largest drop since summer 2005. As so often, the figures were blown around by the weather, which affects consumer habits. A rainy three-day holiday weekend kept shoppers away at a crucial time.
Financial Times

Japan's retail sales fell more than twice as much as economists expected, as a tax increase and a weekend typhoon kept shoppers away from the nation's department stores and car dealerships.
Bloomberg

However a closer look at the data - which can be obtained from the charts below - reveals that this is something more than a one off, there is a trend here, and domestic consumption remains weak in Japan. Indeed the drop year on year is so significant because the July 2006 number was also low, and guess what, the weather was the problem back then. I think both investors and those interested in the future of Japan are entitled to better than this.

Basically, with consumption hugging the bottom as we are seeing, and new economics minister Hiroko Ota claiming there will be no fiscal party, and growth ex-Japan evidently slowing in the wake of the recent financial turmoil, I would be revising downwards rather than upwards my recent GDP appreciation.


First off, here's the index itself.




And here are the changes, year on year.

Economic Impact of the Cabinet Changes

Well it is now hardly breaking news that Abe has shuffled his cabinet. Still there are some interesting points to comment on from an economic perspective. Among the most important details are the fact that Hiroko Ota remains as Economic Minister, while former Minister of State in the Defence Agency Fukushiro Nukaga becomes Finance Minister.

Hiroko Ota has once more been quick off the mark in making her presence felt, in particular she strongly stressed that now "is not the time to increase fiscal spending". This is obviously the case, but the impact of this, if she sticks to her guns, may well be significant on Japanese GDP growth going forward, particularly on the contribution which can be made to overall growth from public investment.

Japanese Economics Minister Hiroko Ota, reappointed in a reshuffled cabinet, said on Tuesday that she opposed an increase in government spending in Japan."It is not the time to increase fiscal spending," Ota told a group of reporters, adding the government needed to continue its reforms.
Reuters

Meantime Fukushiro Nukaga has been busying himself making clear that he does not think that Japan's deflation is completely over and he that wants the central bank to carefully watch world economic and domestic data to avoid making too many mistakes. These statements, while eminently reasonable and plausible, were widely seen by financial commentators as a none too subtle attempt to caution the Japanese central bank from raising rates at the next monetary policy meeting in September.

So with a BoJ which is being urged not to be precipitate in raising rates, and an economy minister who is stressing that government spending won't be the safety net which saves the Japanese economy, can we draw the conclusion that - in intentions at least - the current priority is going to be to try and do something about Japan's huge accumulated government debt?

Japanese GDP

I think we were all more or less on holiday here at Japan Economy Watch when the Q2 2007 GDP data came out, but Ken Worsley over at Japan Economy News did cover the release.

Scott in a comment to Claus's last post points us to a Bloomberg article which discusses a Goldman Sachs research note about whether or not a recession in Japan is now "inevitable". The good news, I suppose, is that a recession in Japan is certainly not "inevitable" - for the simple think that virtually nothing in economic affairs is inevitable - but that simple detail doesn't really get us very far, since the fact that a recession is not inevitable doesn't mean that we won't get to see one. As usual, and as with most things in life, it depends.

Let's take a look at some of the things it depends on.

First off if we look at the chart below we can see that this isn't the first time in recent quarters that the Japanese economy has appeared to slow:



In Q3 2006 the economy seemed to be slowing, only to confound the critics by accelerating again in Q4. So the question is, what are the probabilities of this happening again. Now the following chart isn't especially beautiful, but it should help us see what has been happening. What this chart shows is the share contributed by each of the key components to GDP growth in any given quarter.



As can be seen, while exports are important, they are in fact not decisive. Perhaps I should rephrase that. The situation is rather asymmetrical. Whilst it is more or less unthinkable that a Japanese expansion could continue where exports to take a serious and sustained hit, the recovery needs more than simple exports growth to maintain momentum. So, if we look at Q4 2006, which is pretty much the key recent quarter, we can see that export growth was not much more than in Q2 2007 (the bad quarter), but what made the difference in Q4v 2006 was that all the stars were in alignment, and that the ship powered ahead on all engines, including was public and private-residential investment. In Q2 2007 both of these simply went into reverse gear. Now private consumption is, as we can see, pretty flat, and not decisive, nor - given what we know about the trend in Japanese earnings (and the ageing process) - should we expect it to become decisive at any point in the foreseeable future. So the key data to watch in the coming months will be public investment (ie, what is going to happen to the fiscal deficit now that Abe is in trouble) and private residential investment. If there is no regain of momentum in the property market then it is hard to see Japan's economy regaining momentum, and in the current sup-prime panic atmosphere, it is hard to see the property sector really getting into any kind of party mood. I guess this was one of the factors they will have been bearing in mind at the Bank of Japan when they took the rate decision.

So can Japan avoid recession? Of course it can. Will it? Aha, that is a different question. To find out the answer watch this space.

Update

Japan's new economics minister Hiroko Ota is quoted today as saying she won't increase government spending. If she sticks to this then don't expect any sudden increase in public sector investment, and so don't expect any sudden and dramatic uptick in GDP over the next couple of quarters.

Japanese Economics Minister Hiroko Ota, reappointed in a reshuffled cabinet, said on Tuesday that she opposed an increase in government spending in Japan.

"It is not the time to increase fiscal spending," Ota told a group of reporters, adding the government needed to continue its reforms.

Prime Minister Shinzo Abe carried out a sweeping revamp of his cabinet on Monday after his first line-up was hit by a series of political funding scandals and gaffes that led to the ruling coalition's big defeat in an upper house election in July.

A key issue in the election defeat was a sense in rural areas that cuts in spending by the heavily indebted Japanese government had led to a growing disparity between rich urban and poorer rural areas.