On We Go?

Well, I know that Edward is already preparing something on today's reading on the Japanese surplus which seems to be muddling along just fine even in the midst of ever more uncertain global economic conditions. The question is of course whether this will continue?

Meanwhile, Bloomberg also looks forward this morning to a slew of data due at the end of the week. And the predictions?

On inflation the consensus remains sure that Japan remains in deflation and so do I especially since if we look at the core-of-core index.

Core consumer prices, which exclude fresh food, dropped 0.1 percent from a year earlier, the same pace as the preceding four months, according to the median estimate of 44 economists surveyed by Bloomberg News.

On industrial production however the analysts are rather bullish ...

Separate reports also on Sept. 28 are likely to provide better news on the world's second-largest economy. Industrial production grew 3 percent in August from July, when output dropped 0.4 percent because of an earthquake, according to the median estimate of 46 economists. That would be the biggest gain in almost four years.

Perhaps we will see some seasonal swings on the back of the earthquake in the months to come? Yet, if indeed IP were to grow at 3% it would go some way to falsify my hypothesis that industrial production could be heading for a sustained downward trend in the remainder of 2007. In this light also the recent readings on the trade surplus provides good reading since this is sure to keep those factories ticking. I am awaiting this one with some excitement then.

Finally we have the predictions on unemployment and consumer spending;

The jobless rate probably held at a nine-year low of 3.6 percent and household spending climbed 1.2 percent, the fastest pace since February, analysts predict.

On consumer spending a rise of this magnitude would indeed constitute something of a rebound relative to recent month's meager performance. Once again, there might be some seasonal rebound going on here which of course needs to be smoothed out but I won't be looking for a positive number of the kind we are seeing here. In any case, please do remember my general prediction here in the sense that whatever we attribute to m-o-m readings we are not likely to see Japanese domestic demand push the 1% threshold in 2007.

So, let us wait and see; it is difficult to see just how much importance which can be attributed to this week's readings in themselves since there are bound to be earthquake rebounds etc entrenched in the data but still interesting nonetheless. One thing seems certain which is that if we get an overall positive reading the de-couplers will come back out, the Yen will shoot up, and the BOJ will consequently be pitched to raise before year's end. Luckily, we don't have to believe everything which comes out on the war drums, especially not in these market conditions.

No Hike in Sight at the BOJ

(Cross-post from Alpha.Sources)

As Bernanke chooses to cut 50 basis points and as economic growth is visibly slowing in Europe and even contracting in Japan I don't think many of us expected the BOJ to raise rates. As such, Fukui and his colleagues duly chose to stand firm yet again yesterday as the economy contracted in Q2 2007 and remained mired in deflation. In this way it indeed seems as if Fukui is going to find it mighty difficult to end his term at the BOJ on a hawkish stance. The official decision by the BOJ can be found here (PDF!) as well as the accompanying statement from which I quote below.

Japan's economy is expanding moderately.

Public investment has been sluggish. Meanwhile, exports have continued to increase, and business fixed investment has also continued to trend upward against the background of high corporate profits. Housing investment has fallen lately. Private consumption, however, has been firm in a situation where household income has continued rising moderately. With the rise in demand both at home and abroad, production has continued to be on an increasing trend, although it has been flat most recently.

Japan's economy is expected to continue expanding moderately.

Exports are expected to continue rising against the background of the expansion of overseas economies as a whole. Domestic private demand is likely to continue increasing against the background of high corporate profits and the moderate rise in household income. In light of these increases in demand both at home and abroad, production is also expected to follow an increasing trend. Public investment, meanwhile, is projected to be on a downtrend.

Clearly the main narrative above is riddled with hedging and essentially a lot of word salad given the actual trend we are seeing but this I think is the normal nature of these kinds of statements. People should be clever enough to make up their own minds based on the present data. However, I do think that it would be a mistake to interpret the above as a sign that the BOJ will find space to raise rates anytime in the remainder of 2007. Of course, markets don't agree with me completely :) and thus seem to have a bit of difficulties finding their feet at the moment or at least this is the way I choose to interpret the fact that yields on Japanese notes actually rose on the back of 'bad-boy' Atsushi Mizuno's consecutive dissent in the BOJ's voting which is seen as a forward looking sign that the BOJ might just raise before the end of 2007. Clearly, the Fed decision in itself will have had something to do with this but as for the expectation of a BOJ hike in 2007; well, here is to hoping but I fear that this indeed constitutes a fools hope. For a general overview of the recent economic data and commentary on Japan you can check out the latest posts on Japan Economy Watch which almost constitutes a veritable tableau de noirceur over the recent slowdown in Japan.

If you want to get really up to date on Japan I reproduce the list of my most recent notes on Japan below ...

Japan - The Fundamentals Linger

Still Holding at the BOJ

Small Update on Japan

Is Japan Heading for a Recession? (GEM note)

Furthermore, I recommend you to stay in touch over at Japan Economy Watch where yours truly, Edward Hugh as well as Scott Peterson are always busy to keep you up to date on Japan. Lastly, I also want to endorse the excellent Japan Economy News Blog maintained by Ken Worsley which also presents a never ending stream of commentary and analysis on the Japanese economy and society. In fact, you could even say that between Worsley and the JEW team you don't even need Bloomberg, the FT etc. Ah well, that is of course for you to decide.

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...