Bits and Bobs on the Latest Data from Japan

By Claus Vistesen: Copenhagen

It appears that there is still some green shoots left in the news from Japan even though the underlying picture is one of deteriorating fundamentals. We learned recently how Q1 was absolutely horrid in Japan with out declining at an annualised 15.2% which, I a dread to say, are numbers normally reserved to the likes of the Baltics, Ukraine and Hungary [1]. The second quarter will no doubt offer some improvement and the second derivative is likely to be all over the Q2 data in general. However, the real question is what kind of recovery or stabilisation we will observe and as Edward pointed out recently those two things are not the same and what we most likely to see is the latter and not the former.

In Japan the green shoots crowd soldier on with the news that industrial production showed second consecutive month of expansion in April. Output consequently rose a healthy 5.2% from March and factories are estimated to continue the increase in production throughout May and June.

Japan’s industrial output surged the most in 56 years in April as a rebound in exports helps the economy emerge from its worst recession since World War II. Production rose 5.2 percent from March, the second monthly gain, the Trade Ministry said today in Tokyo. The increase was faster than the 3.3 percent economists estimated, and companies said they planned to boost output in May and June as well.

The yen gained on speculation funds will flow into Japan as the economy resumes growing after last quarter’s record contraction. Still, output is running at two-thirds last year’s levels, saddling manufacturers such as Nikon Corp. with workers they no longer need and driving the jobless rate to a five-year high of 5 percent.

I am skeptical as to the underlying dynamism here in the sense that Japanese companies are still cutting inventories both on a monthly and annual basis which suggest that companies are not expecting a vigorous uptick in future demand. Moreover, the annual print of industrial production restored the depression discourse by clocking in at a healhy 31.2 % contraction.

In the context of inflation the news confirmed that Japan is having none of the green shoots from its domestic market. Consequently, prices continued their deflationary trend with the general index as well as the index stripped from fresh food decining -0.1% from a year earlier. The core-of-core price index on the other hand which strips out headline inflation slumped to an annual -0.4% drop which suggests, yet again, the extent to which Japan lacks the domestic "gusto" to produce anything resembling a recovery. In this vein, household consumption expenditures declined by 1.3% over the year in April and analysts, in general, are none too positive about the prospect of domestic demand in Japan picking up anytime soon, (from Bloomberg);

“The Japanese economy is entrenched in deflation, if we define it as continuous price declines,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Given the economy’s weakness, it’s hard to anticipate consumer prices will reverse course and allow the central bank to exit from its very accommodative monetary policy.” Consumers may delay purchases if they expect goods to get cheaper, eroding corporate profits and forcing firms to cut wages. Japan only emerged from a decade of deflation when prices started to rise in 2005.

Core prices in Tokyo, the nation’s capital, fell 0.7 percent in May from a year earlier, the biggest drop in six years, according to the report. It was the first decline since September 2007.

To add injury to insult, Japan's jobless rate increased by o.2% from March and thus reached the 5% mark. The outlook especially in the manufacturing sector looks bleak with all major industrials such as e.g. Toyota, Nikon, Canon etc looking at very harsh times and production cuts to scale down to the slump in demand for their products. Bloomberg reports that the number of people receiving unemployment insurance increased a massive 59.1% which means that 793.000 people are now receiving such funds.

In the midst of such news one can only feel symphatetic, yet skeptic, that government handouts of 12000 yen to households (Ricardian Equivalence anyone?) and cutting high way tolls will have anything but a comestic impact on the incoming data from the domestic demand side of the economy.

Ok, so this was a small update on the state of affairs in Japan. A little bit of green shoots, but mostly a picture of steadily deteriorating fundamentals and more importantly a picture which confirms that any kind of stabilisation in Japan will be markedly deflationary if it is not accompanied by vigorous external demand. Gee, I wonder why that may the case ...

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[1] - The last country here was originally "Bulgaria", but as a commenter pointed out this would not be appropriate here. Actually, I meant to write Hungary and god only knows why the keyboard punched out Bulgaria in stead. Sorry for that one.

Japan Exports Flat In April

Japan’s external trade held steady in April, although since exports were up ever so slightly on March (13 trillion yen) while imports were down slightly (45 trillion yen) the country did post a slightly larger trade surplus than in March (69 trillion yen, over 10 trillion yen in March).

Nontheless year on year the numbers, while slightly better than in previous months, still look horrible. Shipments abroad fell 39.1 percent from a year earlier, after dropping 45.5 percent in March and a record 49.4 percent in February. From a month earlier, exports rose 1.9 percent on a seasonally adjusted basis, a the second straight monthly gain.

Imports fell 35.8 percent from a year earlier, the ministry said, and the trade surplus was down year on year by 85 percent.

Sales to Europe were down 45.4 percent year on year, from 56.1 percent in March, and indeed exports to Europe were up 50 trillion yen (around 10%) on the month.

Shipments to the U.S. fell 46.3 percent last month, down from March’s 51.4 percent decline, but month on month they were stationary, with the declining annual decrease due entirely to what are known as base effects.


Shipments to China, which is now Japan’s biggest trade partner, fell 25.8 percent in April from a year earlier. The rate of decline thus fell for a third straight month, suggesting Beijing’s $585 billion stimulus package is having an effect, at least as far as Japan exports go. Month on month exports to China we more or less stationary, but they are up around 60% from January's low point. In fact shipments to China are now about a third larger than those to the US, and 40% larger than those to the EU.


Among shipments to China, the Finance Ministry singled out chemicals used to make plastics, mobile phones and digital cameras as actually rising in April from a year.



While there is no doubt that sentiment has begun to improve in Japan’s largest Western markets, it is far from clear that global demand will recover at this point enough to allow Japanese companies to go beyond restocking after a heavy run-down of inventories. And like Japan, China’s economy is driven mostly by exports, so unless we see a stable pickup in global demand recovery there will remain limited. And with US financial markets now funding a large chunk of the carry trade, the yen seems trapped around 95 to the dollar as far ahead as we can see. And all of this, of course, bodes ill for Japanese companies.

Export performance across Asia has been mixed recently. Shipments abroad fell at a slower pace in Taiwan and South Korea last month from March, but both Singapore and China suffered larger drops. Two quarters of record contractions in GDP have now shrunk the Japanese economy to around the 2003 level. Even as declines in overseas shipments moderate, Japan is exporting little more than half as much as last year and producing a third less. And the recession is now spreading to consumers as companies fire workers and cut wages to minimize losses.

Nonetheless Bank of Japan Governor Shirakawa is putting on a brave face, and said this week that the economy may return to growth in the current quarter, although he immediately qualified this by underlining that any recovery will “inevitably be mild.” At their April 30 meeting, a few Bank of Japan board members even went so far as to say that additional policy measures weren’t necessary amid the signs that the economy will recover, albeit gradually and after “some time,” according to the minutes released last week. Since the Bank of Japan has got a track record of underestimating the severity of the recessions which have struck since 1992 let's just hope that history isn't repeating itself again this time.

A case of need

where the need for markets for its industrial sector is causing Japanese leaders to reconsider a longstanding policy. Nikkei is reporting that the Japanese government has decided to lift its ban on arms exports by domestic companies.

"TOKYO (Nikkei)--The Japanese government decided Saturday to relax its rules on arms exports to allow more joint development and production of weapons with other nations and enable shipments to countries with which Japan co-develops arms. The move is aimed at reducing procurement costs and stimulating the domestic defense industry by promoting joint development and production of key arms, such as next-generation fighter jets, with the U.S. and Europe."

Warships, aircraft, armored personnel carriers, UAV's, missiles...these are all things that Japan's excess industrial capacity could be reconfigured to produce relatively quickly. As economic conditions remain difficult, we can expect to see changes in long-held attitudes as national leaders search for alternative markets for idle production capacity.

According to Wikipedia's entry on the Defense Industry of Japan, the country's "indigenous suppliers [have] developed and produced an almost complete range of modern equipment, including aircraft, tanks, artillery, and major surface and underwater naval combatants". The same source indicates that historically "Nearly 60 % of Japanese defense contracts were awarded to five large corporations: Mitsubishi Heavy Industries, Toshiba Corporation, Mitsubishi Electric Corporation, Kawasaki Heavy Industries, and Ishikawajima-Harima Heavy Industries Corporation. "

As an indicator of the potential for growth, the Wikipedia source references "A secret memorandum circulating among defense contractors in 1988 estimated that lifting the export ban would result in Japan's capturing 45 % of the world tank and self-propelled artillery market, 40 % of military electronic sales, and 60 % of naval ship construction".

In particular, the Mitsubishi F-2 has been put into service as a successor to the F-16. This aircraft might make inroads in the international market if the manufacturer was allowed to make foreign sales.

The need for new markets will likely overcome domestic political opposition to foreign arms sales.

Japan's Economy Contracts At An Annualised 15.2% In The First Three Months Of 2009

Japan’s economy shrank at a record rate last quarter as exports collapsed and businesses drastically cut back on investment spending. Gross domestic product fell by an annualized 15.2 percent in the three months ended March 31, following a revised fourth- quarter drop of 14.4 percent, according to the Japanese Cabinet Office. The economy contracted 3.5 percent in the year ended March 31, the most since records began in 1955.



Japan's economy is exports dependent, and exports fell by an unprecedented 26 percent during the last quarter, forcing most companies to drastically cut production. In fact industrial output was down 18.1% on the previos quarter and 34.5% year on year.



GDP fell 4 percent on a seasonally adjusted basis, more than double the 1.6 percent drop in the US, and well above Europe’s record 2.5 percent contraction. Due to the impact of deflation, without adjusting for price changes Japan's economy actually shrank 2.9 percent in nominal (current price) terms in the quarter.



Weaker domestic demand was the biggest contributor to the decline, reducing GDP by 2.6 percentage points, the most since 1974. But this was unevenly distributed between consumer demand and investment. Consumer spending held up reasonably well - and only dropped by 1.1 percent (see chart above) while business investment was down a record annual 10.4 percent, and a massive 35.5% over the last quarter. And companies are likely to keep cutting spending because the decline in external demand has left factories operating well below capacity level, and semi idle workforces can only be retained for so long.

“There is a huge problem of over-capacity,” said Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo. “That means capital spending is not likely to pick up.”

The slump in housebuilding has also deepened, and home construction was down by 25% quarter on quarter.




Shrinking More Slowly?

A number of reports over the past month suggest that the contraction in what is still the world’s second-largest economy may slow (second derivative decrease) for the first time in a year this quarter) as exports begin to stabilise (albeit at a low level) and Prime Minister Taro Aso’s 15.4 trillion yen stimulus plan, announced in April, has some effect.

The most recent Nomura/JMMA Japan Manufacturing Purchasing Managers Index reading rose to a seasonally adjusted 41.4 in April from 33.8 in March, the steepest gain since data were first compiled in October 2001. However the index remained below the 50 threshold that separates contraction from expansion for the 14th straight month.




The Economy Watchers index, a survey of barbers, taxi drivers and others who deal with consumers, climbed to 28.4 in March from 19.4 in February, the second-biggest jump on record, according to the Japanese Cabinet Office.



Japan’s consumer sentiment alos rose - to a five-month high - in March, and the confidence index climbed to 28.9 from 26.7 in February. The index has now advanced for three consecutive months since after plunging to 26.2 in December, its lowest level since the government began compiling the figures in 1982.



Exports also increased in March from a month earlier, as firms across the globe who had run down stocks started to rebuild them.



Still, the failure of export demand to do more than simply stabilize will probably limit the scope of Japan’s recovery. Toyota, Hitachi, and Panasonic have all recently forecast continued production and job losses in the current business year. Panasonic said only last week it plans to close about 20 factories this year and proceed with the 15,000 job cuts announced in February.


Paul Krugman, speaking as far as I can see at a seminar in Ho Chi Minh city, had the following to say, which I pretty much agree with.

“Just about all of the economic indicators out there are suggesting that the free-fall has come to an end, that we’ve stabilized,”

“Probably the worst in terms of shocks to the system is over.....The acute stress that we had last fall after the failure of Lehman has been reduced,” he said. “Interest-rate spreads on commercial paper are way down, interest-rate spreads on corporate debt are down a little bit. The spread on interbank lending is down....“I don’t think we’ve hit bottom, but the bottom is not too much further below us,” he said. “My big concern is that we don’t hit the bottom and bounce, we hit the bottom and stay there. It’s not obvious where recovery comes from.”

It's like someone hit a very sensitive mechanical device with a large sledgehammer, this sent the device reeling under the impact smashing a lot of the works in the process, and now the shock absorbers have done their work and the vibrations are slowing we will be able to assess the true extent of the damage.

He also seems to be warning the US dollar can experience a "Japan-style carry" effect.

“The U.S. dollar is going to fall quite a lot, or at least significantly,” he said. “The demand for dollars has been temporarily inflated by the crisis. Good news is actually bad news for the dollar. If things stabilize, then the safe-haven demand for dollars falls off.”

So the second derivitive is falling. We should not see more 15.2% annual contractions in Japan, but this does not mean GDP will not keep on falling -for how long? This is the part we still don't know.