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Wednesday, October 01, 2003

The Japanese 'Recovery' in Question

blogging has been intermittent, not to say non-existent these last few days as I have been away on fieldwork. The world, however, has not stood still in my absence, and I have the feeling that some of the US data yesterday could turn out to be quitre significant. Certainly it seems that some of the underlying questions about where the principal OECD economies are headed might now start to be clarified. In this context, the latest info from Japan could be read as the beginings of a return to reality. The unemployment numbers need to be read carefully, since the number of people of working age in Japan is now falling, and the drop is to be expected. Morre interesting are the output figures. My feeling is that Japan had revved-up on the hope (and expectation) of a major global recovery, if the wobbly state of the US economy that was revealed yesterday continues to follow this line this will by no means be guaranteed, so expectations in Japan may need to be revsied downwards. Any such revision would simply open up for all to see those 'old problems' which have certainly not been resolved. One last detail: note the comment about the value of the yen not being so high as it seems because of the price effect of years of deflation. Japanese prices, denominated in yen, are a little more competitive each year. However, whatever the fine detail of the situation, a yen at 110 to the dollar is hardly going to help Japan fight the deflation problem.

Unemployment fell to a two-year low of 5.1 per cent in August but industrial output shrank 0.5 per cent in the same month, sending mixed signals about the strength of Japan's recovery. The number of unemployed fell by 280,000 to 3.33m, down 0.2 percentage points from the previous month on a seasonally adjusted basis. This was the first time the monthly jobless number declined by more than 200,000 since 1990. There was also good news in a survey of sentiment among small and medium businesses which showed a surge in confidence close to peaks of the mid-1990s. This improvement in sentiment among Japan's more vulnerable companies comes ahead of today's Tankan business confidence survey, which is seen as one of the economy's most important leading indicators. Revised figures showed growth in the second-quarter at an annualised 3.9 per cent, adjusting for deflation. However, even after revising its growth estimate upwards recently, the government is predicting nominal growth for this year of just 0.1 per cent.

Signs of business confidence and evidence that the economy is at last creating jobs after six quarters of growth were countered by the fall in output. The 0.5 per cent drop came in spite of an increase in shipments, suggesting that manufacturers are still cautious about future growth prospects. Masaaki Kanno, economist at JP Morgan in Tokyo, said: "Manufacturers still do not have the confidence to accumulate inventory." He said the same trend was visible in the US, suggesting that manufacturers might be moving towards a leaner inventory model. Mikihiro Matsuoka, economist at Deutsche Bank, said: "This is not a strong recovery but the upward slope is real." Fears that yen appreciation might choke off recovery were overdone, said Mr Kanno. Because of continued deflation, even if the yen strengthened to Y105 to the dollar, this was equivalent to Y115 in 1999, a competitive rate. He said there was no correlation between corporate profitability and such relatively minor movements in the currency.

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