Japan Retail Sales September 2007

As in August, Japan retail sales in September 2007 managed to eke out a small (0.5%) year on year increase - according to data released by METI today - but as in August this was largely due to a low base effect, since sales in August and September of 2006 were not exactly spectacular (see chart below). Quarter on quarter sales in July-September were down 0.5% on sales in April-June, an outcome which is not exactly a positive indicator for the up and coming Q3 2007 GDP data.

Japan Industrial Output September 2007

Japan's industrial production fell in slightly September from the record August level, as makers of cars and general machinery cut manufacturing following a slowdown in overseas demand. Production was down a seasonally adjusted 1.4 percent from a month earlier, when it surged 3.5 percent, according to data from the Trade Ministry in Tokyo today.



Claus will probably have a fuller comment on the general Japan economy situation up in the near future, so at this point I would simply note that this reading is hardly a very bad one, since the August level was very high after the increase to cover production lost after the earthquake. On the other hand it is very hard to decide what this industrial data really tells us about what to expect from the up and coming Q3 2007 reading since, apart from slowing export growth, domestic demand remains weak, and additionally so since a recent change in building regulations has caused a delay in home construction, with housing starts plummeting 43 percent - to a 41-year low - in August.

Japan Exports September 2007

Japan's exports grew at the slowest pace in two years in September as shipments to the U.S. dropped back. In total exports rose 6.5 percent from a year earlier, according to data from the Japanese Finance Ministry released earlier today. At the same time imports declined for the first time in more than three years, helping the trade surplus widen to yet another record.



Shipments to China, the rest of Asia and Europe, however, remained reasonably firm, and this is important given the fact that exports constitute the main engine of the growth for the Japanese economy. Growth in exports to China slowed somewhat, down to an annual 16.5 percent last month from and annual 23.7 percent in August. Asian exports increased at an 8.3 percent rate after climbing by 16.4 percent in August. Shipments to Europe rose 13.2 percent in September after August's 15.5 percent gain.



Now the situation is slighly deceptive given that a significant part of the exports to China, the tigers and emerging Asia (ASEAN) consists of components which will be processed and then re-shipped elsewhere (principally Europe and the US), but still, there is obviously some element of "rebalancing" going on, and it will be interesting to monitor this as we move forward. The vitality of Japanese exports to the EU is hardly surprising given the relative values of the yen and the euro, but it would be interesting to check just how exports to the EU are growing from Singapore, Hong Kong, Taiwan and South Korea (the position vis-a-vis China is already pretty well known I think).



Exports to the US fell 9.2 per cent from a year earlier, and this was the biggest drop since November 2003, a factor which raises fears that subprime problems were taking a toll on Japan’s major export destination. The main component in the fall in US-bound exports was auto shipments, which fell 15.2 per cent from a year earlier. Construction machinery for housing also fell significantly.

Imports fell 3.2 percent in September, the first drop since February 2004, as oil costs declined 12.4 percent from September 2006. In so doing they confounded a consensus forecast for a 2 per cent increase. As a result, the trade surplus expanded by 62.7 per cent to a record Y1,640bn ($14.3 bn), compared with economists’ median forecast for a 47.1 per cent rise to Y1,500bn.



Japan needs export growth if the economy is to rebound from its second-quarter contraction as falling wages keep the lid on spending by consumers at home. Japan’s economy in fact contracted 0.3 per cent in April-June largely as a result of a slump in capital spending, so it will be very interesting to see whether Japan is able to turn this situation around in the July-September quarter, and if it does manage to do this, just how it manages to do so.

David Pilling on Koizumi and Reform

Financial Times journalist David Pilling - who is a very able Japan watcher - has a most interesting piece in the FT today. Since he makes some very simple points in a very clear fashion, I will take the unusual step - for this blog at least - of quoting at some length.

David Pilling makes several points which are very well taken. In the first place, he points out that Japan's recent "recovery" is much more the result of strong external demand than it is of structural reforms. Indeed Japan is very dependent on export growth for GDP growth as Richard Katz also explains.

Kiichi Murashima, chief economist of Nikko Citigroup in Tokyo, has just returned from London. He did not have much fun. After several meetings with investors in both Japanese government bonds and equities, he concluded: “People are losing interest in Japan.” Lack of enthusiasm stems partly from the fact that Japan’s less-than-exciting growth remains dependent on now-more-uncertain external demand. But underlying the disappointment is a deeper concern that political paralysis resulting from last month’s collapse of Shinzo Abe’s administration will lead to policy seizure.

Superficially, such fears are understandable. Last month Yasuo Fukuda, a 71-year-old man in a grey suit, was hustled into office by a few faction bosses of the ruling Liberal Democratic party. The selection smacked of old-style Japan before Junichiro Koizumi, the last-but-one prime minister, subverted convention by appealing directly to public support.

Secondly Japan is now suffering from some form of "reform fatigue", and this will be important as we move forward:

Worse for the worriers, Mr Fukuda, a consensus-style politician, assumes office at a time of apparent backlash against “Koizumi reforms”. In July the ruling party was punished in upper house elections by voters in poorer parts of Japan, for whom five years of recovery has had little tangible effect.

Outside of the labour market and the banking sector - which mainly happened before Koizumi arrived - there has been very little in the way of real structural reform, and even less in the way of "fiscal consolidation". The biggest genuine Koizumi reform was postal privatisation, but this did not start until a year after he left office and will not be completed until 2017.

There is a misunderstanding about the nature of structural reform and what role, if any, it played in Japan’s recovery. At the best of times, “reform” is a sloppy word used to mean “good change”, a convenient sanctuary for politicians unwilling to concede that not every new law they instigate is beneficial. In Japan, where it has been conflated to mean both fiscal consolidation and deregulation, the term is less illuminating still.

What role did either cutting budgets or pushing deregulation under Mr Koizumi have in boosting growth? Almost none. When he took over during a banking crisis in 2001, he promised to slash government borrowing. Fortunately, he did no such thing. To have done so would have risked tipping the deflation-riddled economy into even deeper recession. He did cut public works budgets. Towards the end of his tenure, he brought overall spending under control and raised revenue through stealth taxes. This may have been good for the long-term health of Japan. But few economists, if any, have argued that it spurred recovery.

Deregulation can accelerate growth. But most Japanese deregulation – for example in the financial and retail sectors – was instigated before Mr Koizumi arrived on the scene.

Lastly, Pilling emphasises, it has been strong external conditions which have given the seemingly positive result, in the Japanese case China, and in the German one Eastern Europe (this part is, of course, my view).

The real key to recovery under Mr Koizumi was the beneficial effect of a booming China on exporters and success in getting banks in shape. Exports were helped further by massive currency intervention to keep the yen low. Even in Japan’s muddled debate, that policy was never classified as reform.

At the end of the day I cannot but agree with David Pilling's concluding remark.

There are legitimate reasons to worry about Japan, not least the failure of wages to rise and consumer demand to stir. But concern that Mr Fukuda will tear up Mr Koizumi’s reform manual is not one of them.

There are, note are, reasons to worry here, and plenty of them. As Pilling would also point out, we are still mired in deflation and there is now real sign of this problem going away.