Doubts Continue About Japanese Consumption

The Japanese Cabinet Office have just released another report on the state of the Japanese economy. Unsurprisingly they one more time draw attention to the lacklustre state of Japanese domestic consumption:

the report, which looks at a variety of economic factors besides gross domestic product, warned of weakness in consumer spending, saying sluggish growth in wages was keeping spending flat.

Domestic demand, which accounts for more than half the economy, undercut growth in the July-September quarter, forcing the government to downgrade its economic outlook earlier this month.

The latest report echoes concerns that although Japan has emerged from a decade-long economic stagnation — with robust exports contributing to record profits at Japanese companies — those profits have not driven up wages and spending.

The Japanese economy's recent growth is also less stellar than the double-digit growth it experienced from the late 1960s. The economy grew at an annualized pace of 0.8 percent in the third quarter.

Prime Minister Shinzo Abe later told reporters that he would work to realize economic growth that "can be felt by the general public."

The BoJ governor Toshihiko Fukui was unusually downbeat:

"We can keep an accommodative monetary environment led by very low interest rates for some time," Fukui told business leaders at a year-end meeting of the Japan Business Federation, also known as the Nippon Keidanren.

"We will tighten monetary policy if economic activity and prices develop in line with our projections," he said.

My feeling is that they are worried, not rattled, but worried, and they have reason to be. If cLuas and I are right here, and domestic demand isn't going to recover as anticipated, there are important policy changes to be made, and if they are to be effective these need to be made sooner rather than later.

Surplus Widens in Japan

(Cross post from Alpha.Sources)

The November data on Japan's trade is out and Bloomberg reports how the surplus has widened on the back of accelerating exports and a low yen.

Japan's export growth unexpectedly accelerated in November, easing concern that the expansion of the world's second-largest economy is cooling. Imports slowed, reflecting a decline in oil prices.

Exports rose 12.1 percent, helping the trade surplus widen to 915.9 billion yen ($7.7 billion) from 594.4 billion yen a year earlier, the Ministry of Finance said today in Tokyo. Imports gained 7.5 percent, down from 17.5 percent in October.

The yen's decline against the dollar and euro has helped reduce the effects of slower overseas demand, bolstering exports. Shipments abroad grew at the slowest pace in six months in October, causing concern that the economy would stall amid sluggish consumer spending at home.

``There is no doubt that the yen's weakness remains an engine for Japan's exports,'' said Yoshimasa Maruyama, an economist at BNP Paribas. ``Today's numbers confirm Japan's exports maintain more momentum than we had expected.''

(...)

Japan's economy expanded an annual 0.8 percent in the third quarter and would have shrunk if it weren't for strong export growth and corporate spending on factories and equipment. Consumer spending, which accounts for more than half of the economy, had the biggest decline in almost a decade.

Japan is indeed growing but ever more so on exports which, I might add, is totally in line with expectations since Japan's old and ageing population can't support growth through domestic consumption. In short; the idea of a balanced growth path is really difficult to sustain here. An interesting point here is also how the low Yen has helped to boost exports. This is of course not very complicated to understand but it should be quite clear that if exports continue to be the main driver of growth (I believe this will be the case) then the BOJ simply won't be able to raise rates. This is mirrored in the situtation on consumer spending which seems to be persistently downtrending despite an after all pretty loose monetary stance of 0.25%. This means that if Japan is going to sustain economic growth the BOJ will have to keep those rates down. Clearly, this has implications for international capital flows and as I have argued recently demographics form a considerable part of the picture. Edward Hugh's recent post on emerging markets is also very much to the point I think. In my opinion we need to look at Japan as testcase for how a country with a relatively very old (in fact, the oldest) population is positioned in the international economy and once we understand why this is we need to go to Italy and Germany and try to apply some of the same reasoning. It is, as I have said before, at this point that we can see how demograpics represent a very strong anchor to conceptualize the dynamics of the macroeconomic environment.

Japan: Fiscal Tightening Ahead

Koji Omi, Japan's finance minister, claimed yesterday that the gross domestic product deflator - an important measure of deflation - would turn positive in the year to March 2008 for the first time in a decade:

“The GDP deflator for the current fiscal year was minus 0.4 per cent, and that will become plus 0.2 per cent in fiscal 2007/08,” he said. “That shows the economy will become normal.”

Not everyone is completely convinced however:

Robert Feldman, economist at Morgan Stanley, said the disappearance of deflation as measured by the GDP deflator would be an important moment if it came true. However, he said that five years of economic growth were feeding through more slowly than expected into inflationary pressure.

This is just the point. As I have been arguing, consumer demand is proving to be much weaker than might have been expected, and this is raising doubts whether Japan can, finally, escape deflation.

Inflation has yet top break the 1% mark, and the yen is running still at historic lows against the euro, and is fairly weak against the dollar, both circumstances which are likely to be inflation positive.

At the same time Prime Minister Shinzo Abe seems determined to try to move forward to address the government debt situation, so that may well help explain the reluctance, commented on yesterday, of the BoJ to raise interest rates.

In fact the cuts they are looking at are no mere trifle:

Japan's government may eliminate its budget deficit earlier than the target date of 2011, Finance Minister Koji Omi said, confirming Prime Minister Shinzo Abe's commitment to cutting the world's largest public debt.

``If we just persist a little longer we may even be able to come in ahead of schedule,'' Omi said today in Tokyo after his ministry proposed reducing new bond sales by a record and curbing spending on public works in the year starting April 1.

The so-called primary deficit, the gap between revenue without new bond sales and annual spending excluding interest payment on debt, will decline to 4.4 trillion yen in fiscal 2007 from 11.2 trillion yen this year, improving for a fourth year. The government in July said it wants to eliminate the primary deficit by 2011 to stop the public debt from expanding.

So they would be aiming to make 7 trillion yen of savings in one fiscal year. Since this saving is only to come from a reduction in borrowing, and since interest rates are still only at 0.25% (and thus could not be claimed to have been excessively driven up by government borrowing), it is hard to see where the uptick in demand is going to come from to compensate for the cuts.

So it is hard to see the BoJ being especially vigorous with trying to raise rates, and it is hard to see where the inflationary pressure they are going to need to get themselves out of the mire of deflation is actually going to come from.

No Change At The Bank of Japan

Unsurprisingly, the Bank of Japan kept interest rates unchanged yesterday.The decision was unanimous. . Obviously that now opens the question as to whether they will in fact ever (in the short run I mean) be able to get round to raising. It depends on the external environment, and how much exporting they will be able to do in Q1 2007, I guess. But still they won't be going very far.

Bonds rose and the yen fell after Fukui said the bank wants to check more statistics on consumer spending and prices, which he described as ``somewhat weak.'' The bank isn't under pressure to raise rates because the economy, while in its longest expansion since World War II, grew at the slowest pace in almost two years last quarter.

``Fukui admitted that the some sectors of the economy, such as spending, are weak,'' said Hitomi Kimura, a bond strategist in Tokyo at JPMorgan Securities Japan Co. ``Such comments reduced expectations for higher rates.''

The yield on the benchmark 10-year bond fell 5 basis points to 1.63 percent at 5:54 p.m. in Tokyo. The yen declined to 118.12 per dollar from 117.92 before the announcement the key lending rate would be unchanged.


Tankan Report

The yen had its biggest drop in four months last week as reports, including the Tankan survey of business confidence, failed to provide enough evidence that the economy is accelerating.

The Tankan survey released last week showed confidence among large manufacturers rose to a two-year high and companies increased their forecasts for spending, profit and sales. They also said production capacity was the tightest since 1991 amid the most severe labor shortages in 14 years.

That survey wasn't enough to allay concern that the economy is slowing that followed the third-quarter gross domestic product report. The economy grew at an annual 0.8 percent pace in the period, less than half the government's initial estimate, as consumer spending slumped.


Meantime Cluas Vistesen has another timely post digging a bit deeper into the Japan phenomenon.