Japan Services Activity Down In July

Demand for services in Japan fell in July (slightly).The tertiary index, which is a gauge of money households and businesses spend on services ranging from phone calls to leisure, slipped 0.5 percent from June, according to data from the Trade Ministry released this morning. This data point is significant since services these days form such an important part of domestic consumption (Actually, honest answer, I don't really know how much. This is something I should calculate. Maybe when the next quarterly GDP numbers are released). Anyway here's the relevant chart:



This really confirms my general impression that Japan peaked domestically at the turn of the year. Since that time the general trend has been slightly down. With exports now under threat from the global slowdown this trend should become a little more pronounced as we go into the winter. Also the July reading is significant, since it forms part of Q3. It also accompanies data we have seen about machine orders being slightly down. If this pattern continues a second quarter of negative growth now looks very much on the cards.

Catch-22...Japanese-style

A Google search very quickly turned up an article by William Pesek Jr. from the International Herald Tribune which states that "roughly 96 percent of Japan's government securities are held domestically, enabling officials to avoid capital flight even as they sell mountains of debt." This is a very important factor to consider when reviewing the data and commentary that Edward and Claus have provided in recent posts here. Given that most Japanese government debt is held domestically, will ratings downgrades have any meaningful effect on the valuation and ownership of this debt? I tend to think not.

Another question that comes to mind is where the cash for the increased purchases of US Treasuries by Japanese is coming from. Presumably from the proceeds of recent trade surpluses with the US, as Japan's sovereign debt hasn't been decreasing. However, given that there seem to be few viable domestic investments available to Japanese investors, purchases of US debts aren't surprising.

Unlike Edward, I tend to agree with Richard Katz's assertion that ""Behind this inordinate export reliance is a recovery strategy that suppressed wages and consumer spending. Falling real wages raised corporate profits and helped finance the resolution of non-performing loans." I would note that this strategy is nothing really new. Japan's economic policy has alwas been to keep the greater part of the proceeds from its economic growth since the beginning of the post-war rise out of the hands of the labor force and re-invest them into its export sector. That is why the Japanese populace has a standard of living considerably lower than the citizens of other industrialized nations. Whether the resolution of Japan's banking crisis was assisted by some adjustment of this general policy is beyond me at the moment, but if the case would not be surprising to me.

However, I agree with Edward that analysis of Japan's situation based on life-cycle consumption theory and productivity theory are a necessity and the conclusions we assert here at Japan Economy Watch that Japan is very close to hitting the proverbial wall based on the results of such analysis are really undeniable. I welcomed Edward's quote from the Fitch official that "Japan needs to make difficult decisions about its budget, said James McCormack, head of Asia sovereign ratings for Fitch, following the resignation of Prime Minister Shinzo Abe. ``The government has to raise taxes and cut spending, and it is difficult for a weak government to do either,'' McCormack said, speaking by phone from Beijing. ``The timing of Abe's resignation is odd, although the actual resignation is not.'' I would just say that it is pretty much difficult for any government to raise taxes and cut spending. However, given my first point, the Japanese public have been issuing IOU's to themselves, presenting the tax hike/spending cut as a way to pay themselves might possibly motivate the voters to approve such a policy. But it seems unlikely...

Japanese Appetite For US Bonds On The Rise?

Japanese investors bought more foreign bonds in net terms last week than at any time in the last two years. The appetite for US bonds seems to have been boosted, rather than deterred, by increasing expectations of a cut in the US benchmark interest rate.This would seem to be for the rather perverse reason that if the Fed have to lower interest rates this is probably an indication that the US economy may be rather weak going forward, and since the Japanese economy is effectively dependent on exports to the US - even if via the Asia route - then the likelihood of any kind of raise form the BoJ in the near future drops steadily towards zero.

As predictions of a cut in the Fed funds rate continued to multiply, investors rushed into US government bonds before prices became even higher, analysts said. Net buying soared to Y1,392bn compared with Y140bn the week before, the finance ministry said on Thursday.

News last Friday of a drop in US employment turned the flow to US bonds into a stampede. These were particularly attractive because prices of Japanese government bonds are unlikely to rise further because yields are already so low.

Akihiko Yokoyama, government bond strategist at JPMorgan, said: “Probably US interest rates should be much lower than current levels. [But] can you really believe Japanese yields can fall?”

Moody's Don't Miss A Shot

Following all the stick that they have taken over the sub prime scandal, one should now expect the ratings agencies to use the vocabulary of "strong vigilance" in connection with those sovereign debts whose scale defy the limits of credulity, especially Italy and Japan. Hence, with all the uncertainty surrounding policy direction following Abe's departure (and see the last post for some indication of the spending pressures which are going to come from the ageing electorate). Moody's have not been slow to react:

Moody’s Investors Service, the ratings agency, on Thursday warned about the danger of policy drift amid the uncertainty. Thomas Byrne, vice-president, said the Japanese economy’s 1.2 per cent contraction in the second quarter of this year remained of concern. “If policy slippage were to allow such trends to go unchecked, the government’s goal of restoring primary fiscal balance by 2011...would be jeopardised.”

This is, I think, what we can increasingly expect from here on in.