Real exports (adjusted for price change impacts) rose an estimated 8.0% over May (according to Nomura calculations), the fourth straight monthly increase. Q2 real exports were up 12.2% over the previous quarter, demonstrating a strong rebound from the 28.7% decline in Q1. Exports are clearly stronger. Nomura estimate that external demand made a +1.1ppt contribution to real GDP growth in Q2, a complete tirnaround on the –1.4ppt contribution in Q1. The export orders index in the manufacturing PMI, which many see as a leading indicator of Japanese exports, was also up 1.4ppt month on month in June, marking the sixth straight monthly of increase.
Nomura's seasonally adjusted regional export volume indices show improvement across all regions, but exports to Asia improved the most. Apr–Jun exports to Asia rose 18.9% q-q (versus –21.3% q-q in Jan–Mar), those to the US rose 7.4% q-q (–33.3%), while those to the EU rose a very weak 3.8% (–30.7%).
Faster growth (and faster lending) in China is evidently propping up sales for Japanese manufacturers. China, which grew an annual 7.9 percent last quarter, has now surpassed the U.S. as Japan’s biggest export customer. Chinese government subsidies to encourage consumer spending and investment in building projects have benefited Japanese manufacturers. In fact June exports to China fell 23.7 percent from a year earlier, the smallest drop since October.
Shipments to the U.S. declined an annual 37.6 percent, the least since December.
Sales to Europe slid 41.4 percent, the best this year, but still steep on the back of very weak quarterly growth
The largest contribution to higher exports came from electrical equipment, chemicals and transport equipment. Real exports of electrical equipment rose 23.9% q-q in Q2, following a decline of 26.9% in Q1, chemicals rose 23.2% (–10.6% Q1), and transportation equipment 7.7% (–42.0% Q1). The large increase in electrical equipment exports is generally thought to be related to higher exports of semiconductors and electronic materials, which are heavily weighted towards Asia. Exports of general machinery remained weak, falling 8.0% q-q in Q2 (–31.8% in Q1). Machinert exports have failed to recover since falling sharply at the end of 2008, and this is evidently a reflection of persistent weakness in capex generally, something which should serve to question a little the overall robsutness of recovery.
Japanese machinery orders dropped in May to a record low (see table below) with firms limiting their spending as the economy remained weak. Core private sector machine orders, viewed as a key indicator of capital spending, fell 3% from April to 668.2bn yen ($7.1bn). May's drop is less than the 5.8% fall seen in April, but still in sharp contrast to the 2% rise analysts had forecast.
Deflation Getting Entrenched
Japan is under continuing deflationary pressure, and consumer prices fell at a record pace in May, adding to the risk that deflation will become entrenched. Prices excluding fresh food slid 1.1 percent from a year earlier after dropping 0.1 percent in the preceding two months, the statistics bureau said today in Tokyo. This was the sharpest decrease since comparable figures were first compiled in 1971.
Even excluding food and energy, consumer prices fell 0.5 percent in May, the fastest pace in 22 months. Core prices in Tokyo, a harbinger of national inflation trends, fell 0.7 percent in June from a year earlier, making for the biggest drop in six years. The Bank of Japan now forecast that core prices, the central bank’s key gauge of inflation, will slide 1.5 percent this fiscal year and 1 percent in the next.
And wholesale prices seem to suggest worse to come. Japan's domestic corporate goods price index, the nation's benchmark measure of wholesale prices, fell a record 6.6% in June from June 2008. The result was marginally stronger than the 6.3% fall forecast in a survey of economist by Kyodo News and the 6.4% projected in a Reuters poll. It was also the largest on-year tumble on record. From May, the index was down 0.3%. Export prices were down 12.8% on year in June, while import prices were 32.2% lower.
Falling wages and unemployment rate at a five-year high are forcing households to reduce spending. Japan's jobless rate rose to 5 percent in April, the highest since 2003, and there are about two people looking for work for every job vacancy, the most severe job shortage on record. The Organization for Economic Cooperation and Development have forecast Japan’s jobless rate will rise to an unprecedented 5.8 percent in 2010. Real wages have now fallen for 11 consecutive months, the worst performance in six years.
And there may well be much worse to come. The government now estimates the number of surplus to requirements workers in Japanese companies jumped to 6.07 million in the first quarter of the year. This was the highest level ever recorded, according to the fiscal 2009 Annual Report on the Japanese Economy and Public Finance.The number of excess workers is calculated by subtracting the number of what the Cabinet Office deems to be the optimum number of employees from the actual number of employees. According to the white paper, the number of surplus workers had been on a declining trend after hitting a peak of 3.59 million in the first quarter of 1999, now, as can be seen in the chart below it is surging once more, and will be a harbinger of huge layoffs if global demand for Japanese products doesn't really pick up soon.
Unsurprisingly Japan’s retail sales dropped for a ninth month in May. Sales slid 2.8 percent from a year earlier. Department-store sales fell 12.3 percent in May, the 15th monthly decline, and supermarket sales also slumped. From a month earlier, retail sales were unchanged after rising for the first time in eight months in April.And declines in consumption may accelerate in coming months once the effect of Prime Minister Taro Aso’s stimulus measures wears off. The Japanese government has given cash handouts to residents, as well as tax breaks for fuel-efficient cars and incentives for buying eco-friendly televisions, refrigerators and air conditioners, and still sales fall.
Given the extent of the stimulus programme it is perhaps not surprising that Japan's overall household spending rose 0.3 percent in May from a year earlier in price-adjusted real terms. This follows more than twelve months where Japanese households had been continuously pruning spending as companies cut jobs and bonuses. Compared with April on a seasonally adjusted basis, spending rose 2.2 percent. Spending by wage earners' households rose 1.8 percent in May from the same month a year earlier.
Basically, the future of the Japanese economy hangs on the future of the global one. It is hard to see the economy advancing on the momentum of domestic consumer demand alone, and we should expect the positive push the economy has received this year from the various stimulus packages to diminish in 2010 as the incoming government (of whichever party) finds itself increasingly constrained by the burden of the growing volume of government indebtedness.
Japan still retains its lead in engineering. A showroom at Panasonic's headquarters displayed a heated, multifunction toilet seat that conserves energy. (Wouldn't leaving the seat cold conserve even more?) The sleek Shinkansen bullet trains roll up to their appointed spots on time. TKX, an 87-year-old Osaka-based company that makes abrasives, has adapted its expertise to cutting silicon ingots into wafers for solar panels.
But social engineering is proving more challenging. Japan's population peaked in 2004 at about 127.8 million and is projected to fall to 89.9 million by 2055. The ratio of working-age to elderly Japanese fell from 8-to-1 in 1975 to 3.3-to-1 in 2005 and may shrivel to 1.3-to-1 in 2055. "In 2055, people will come to work when they have time off from long-term care," said Kiyoaki Fujiwara, director of economic policy at the Japan Business Federation.
Such a decline is cataclysmic for an indebted country that values infrastructure and personal service. (Who is going to maintain the trains, pay for social benefits, slice sushi at the Tsukiji fish market?) The obvious answers—encourage immigration and a higher birthrate—have proved difficult, even impossible, for this conservative society. In the United States, foreign-born workers make up 15 percent of the work force; in Japan, it's 1 percent. And, official protestations to the contrary, they're not particularly welcome. One columnist I met compared the standard Japanese attitude toward immigrants to that of French right-winger Jean-Marie Le Pen. In the 1990s, descendants of Japanese who had emigrated to South America early in the 20th century returned to replace retiring factory workers. Now that unemployment is on the rise, Japan is offering to pay the airfare for those who wish to return home.
Japan doesn't particularly want to import new citizens, but it doesn't seem to want to manufacture them, either. It's become harder to support a family on a single income, and young people are living at home for longer. And Japan isn't particularly friendly to working mothers—pre-K day care is not widely available, and the phrase work-life balance doesn't seem to have a Japanese translation. (The directory of the Japanese Business Federation, a showcase of old guys in suits, makes the Republican Senate caucus look like a Benetton ad.) The upshot: a chronically low birthrate. Too often, demographic change was described to me as a zero-sum game—rather than being seen as potential job creators, women and immigrants are often seen as taking jobs from men.
As Gross goes on to argue, Japan seems awfully passive about this and while there is certainly merit in discussing whether the size of the Japanese population is moving in the right direction it is the composition which really matters here. You only need to move back one entry here at this space get some kind of indication of the outlook for Japan's population composition. There is really no need to get into the whole discussion about whether economic growth is a goal in itself or whether Japan shouldn't have the right to conduct the policies it wants. Evidently, it has. However, for all those who believe that aggressive population management is desirable either be it through deliberate policies (a la China) or by simply allowing the demographic transition to run its course (i.e. Germany, Japan etc) they should also provide an answer towards the question of what to do with the market economy defined, as it were, by a social contract between generations, some form of paygo pension system, as well as a wide batch of centrally provided goods.
Gross' analysis is not far from the view presented in a recent article by me and Edward published in the summer edition of JapanInc. In this article, we argue that Japan is dependent on exports and that this dependence is a function of its age structure.
We also emphasise that Japan, for all intent and purposes, may be stuck in so far as providing a strong response towards the challenge of ageing;
While it is certainly true that the Japanese economy is currently struggling, it is not entirely true that there is no line of defense. Japan still has both monetary policy and fiscal policy tools at its disposal. The problem is that having spent a decade and a half attempting to fight the twin problems of deficient internal demand and ongoing deflation, the force of these tools has been steadily ground down. Interest rate adjustments, after many years when Bank of Japan (BoJ) rates have been held near zero levels, have little additional push to offer, while less conventional tools (like simply printing even more money via quantitative easing) or strong fiscal stimulus face clear limits in a country where gross debt to GDP is forecast by the OECD to hit 193 percent in 2009. So what can Japan do? Well besides simply grinning and bearing it, the tragedy is that there is not a lot that can be done in the short term. Evidently the Japanese government should give what support it can through highly targeted spending programs. The Bank of Japan, meanwhile, should be moving ahead with an aggressive policy of quantitative easing to provide as much relief as possible to Japan’s struggling households and corporates. But the only real way forward here is to try to slow the rate of population aging, and that means a change in national discourse and priorities, giving more support to those Japanese women who want to have children and radically changing the mindset about the extent to which Japan needs to promote an active immigration policy.
However, if we can all agree that the situation is difficult, it is hardly an excuse for not moving forward on the issues which ultimately will need to be adressed. Japan will need to foster a more conductive policy for increasing fertility as well as a substantial changed is discourse is needed with respect to immigration.
TOKYO (Reuters) - Japanese Prime Minister Taro Aso plans to call a general election on August 30, a top ruling party official said on Monday, despite the prospect that his long-ruling conservative party is headed for a big defeat. The decision to dissolve the lower house for a vote follows a crushing loss for the unpopular leader's ruling bloc in a Tokyo assembly election on Sunday that was seen as a barometer for the national poll, which is due no later than October.
Parliament's powerful lower house would be dissolved next week to set the stage for the election, Hiroyuki Hosoda, secretary-general of the ruling Liberal Democratic Party (LDP), told reporters. Moves within the LDP to replace Aso had been expected to grow after the party and its junior partner lost their majority in the Tokyo assembly but Hosoda said he saw no such moves now. A Democratic Party victory in the national election would end half a century of nearly unbroken rule by the business-friendly LDP and raise the chance of resolving political deadlocks as Japan tries to recover from its worst recession since World War Two. Chaos has gripped the LDP, with Aso's critics inside the party speaking of ditching him while the party's campaign strategist had tried to draft an ex-comedian for its ticket.
"It's clear if parliament is dissolved now, the result would be the same as the Tokyo election," Natsuo Yamaguchi, policy chief of the LDP's junior coalition partner, the New Komeito, told a TV Asahi program. The Democrats have pledged to pay more heed to the rights of consumers and workers than those of corporations and to pry policy-making decisions out of the hands of bureaucrats as a way to reduce wasteful spending.
If you have more info and comments please do feel free to drop them in the comments section. Like I hinted in the beginning, this is not a blog on political analysis, but given the huge amount of issues which are looming I am interested in the way the discourse evolves once the gridlock is officially absolved and the fight begins.
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