Japan July 2007 Industrial Output

Numbers released today by the Ministry of Trade, Economy and Industry showed a fall in industrial production in July, a development which will provide further encouragement for BoJ bearishness on interest rates. Industrial output fell a seasonally adjusted 0.4 per cent from June.





In this case it doesn't so much seem to be the weather which is being given the reponsibility, but rather the earthquake:

``Industrial production was affected by the earthquake, but if you look at the outlook, we needn't be too concerned,'' Economic and Fiscal Policy Minister Hiroko Ota said at a regular press conference in Tokyo.

However, if we look at the chart for the rate of annual increase by month, we will see that this has now been slowing since February, and maybe my memory is short but I don't recall earthquakes in March, April, May or June.

Japan July 2007 Income and Expenditure Survey

Spending by households dropped in Japan in July for the first time in seven months, according to data released today by the Statistics Bureau. Here's the chart:



As usual, we are being told that the weather is the problem:

Spending by households unexpectedly dropped for the first time in seven months, as a typhoon kept shoppers at home and a tax increase weighed on sentiment.
Bloomberg

In fact, just a quick look at the chart should tell you that we may now be resuming a trend which was all too evident across a big part of 2006, typhoon or no typhoon. We haven't seen any upward movement in consumption worth speaking about since May. now

Japan Consumer Prices July 2007

Japan remained mired in deflation for the sixth straight month in July, according to figures published by the statistics Office today that showed a 0.1 per cent fall in core consumer prices (excluding fresh food) over July 2006. The news obviously will make it even harder for a Bank of Japan which was already struggling to find arguments to justify a raise in interest rates at its September monetary policy meeting. Indeed the odds on a rate rise this year (or even this business cycle) now seem to be reducing rapidly.

Here is the chart of the index itself:



And here are the year on year percentage changes for the three principal indexes. As can be seen we are back in deflation across the board since January.



Comment

Only a few months ago, an autumn rate rise had become the consensus view among Japan economists. But since then, turmoil in global credit markets and a fall in Japanese share prices have generated a wait-and-see attitude among BoJ board members, making them reluctant to raise the benchmark rate above its current 0.5 per cent level. Thursday’s weak retail sales figures, and Friday’s evidence of continuing deflation, make a rate rise in September even less likely.
Financial Times

The reports bolstered speculation the Bank of Japan will delay raising interest rates until it can gauge the effects of the U.S. housing recession on growth in the nation's biggest export market. Expectations of a rate increase have fallen since losses on U.S. subprime mortgages caused corporate credit costs to jump, global stocks to plummet and the yen to surge.
Bloomberg

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.