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.
Monday, December 25, 2006
Thursday, December 21, 2006
Japanese Exports Continue To Power Ahead
Japan's export growth accelerated in November:
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.
The reason for the increase isn't too hard to pin down:
``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.''
and there is evidence that relative movements in currencies are being reflected in the differing rates of increase to the receiving countries:
Exports to the U.S. climbed 8.6 percent, the slowest in five months. Shipments to the European Union accelerated to 12.9 percent from 8.7 percent. Exports to China quickened to 19.5 percent from 18.3 percent.
The yen is trading about 7 percent below the average rate last year, making Toyota cars and other Japanese goods cheaper abroad. The yen has fallen 7 percent against the euro in the past six months, buoying the value of imports. Exports to the region measured by volume, which don't take into account price changes, only grew 2.9 percent in November.
That is you only get the relatively higher number for the euro region (12.9% vs 2.9% when you take into account the yen value of products sold in dollars). Then note the following:
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.
Not only is the Japanese economy dependent on an export model, but it will actually start to shrink if exports lose momentum. So while this is not the full recovery everyone has been expecting, it is sustainable, just as long as the export growth continues. Quite a delicate situation, and one which explains the sensitivity of Japanese stocks and bonds to each and every jitter in the United States. Given that they are now becoming more and more dependent on Europe, I guess the sustainability of Germany's recovery is now also very much a matter of concern to them.
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.
The reason for the increase isn't too hard to pin down:
``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.''
and there is evidence that relative movements in currencies are being reflected in the differing rates of increase to the receiving countries:
Exports to the U.S. climbed 8.6 percent, the slowest in five months. Shipments to the European Union accelerated to 12.9 percent from 8.7 percent. Exports to China quickened to 19.5 percent from 18.3 percent.
The yen is trading about 7 percent below the average rate last year, making Toyota cars and other Japanese goods cheaper abroad. The yen has fallen 7 percent against the euro in the past six months, buoying the value of imports. Exports to the region measured by volume, which don't take into account price changes, only grew 2.9 percent in November.
That is you only get the relatively higher number for the euro region (12.9% vs 2.9% when you take into account the yen value of products sold in dollars). Then note the following:
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.
Not only is the Japanese economy dependent on an export model, but it will actually start to shrink if exports lose momentum. So while this is not the full recovery everyone has been expecting, it is sustainable, just as long as the export growth continues. Quite a delicate situation, and one which explains the sensitivity of Japanese stocks and bonds to each and every jitter in the United States. Given that they are now becoming more and more dependent on Europe, I guess the sustainability of Germany's recovery is now also very much a matter of concern to them.
More Thoughts On Emerging Markets
The Financial Times has another fascinating story today about how yield-differentials on emerging market debt are once more back at historic lows (see my other posts on this over the last few days):
Risk premiums for emerging market bonds fell to match their record low on Wednesday, only two days after the shock imposition of capital controls in Thailand reminded investors of the potential risks associated with the sector.
Investors measure the risk of emerging market debt by comparing their yields with those of US Treasuries, seen as the safest sovereign bonds. As measured by JPMorgan’s EMBI+, a benchmark indicator, that spread fell on Wednesday to 172 basis points – one basis point is equal to 1/100th of a percentage point – over US Treasuries, equalling a record low hit last in May.
So we are back where we were in May: before Iceland, Turkey, Hungary etc.
And why, may we ask, is this? Well, first of all let's look at this problem the other way round: why did they start to widen in the first place?
The EMBI+ last reached a record tight level of 172bp on May 1. The spread subsequently widened to 238 basis points by June 27, as investors worried that central banks were poised to tighten monetary policy more aggressively as oil prices approached $80 a barrel.
So we need to think about two things, oil prices and central bank tightening. Well oil prices have now stabilized somewhat (although if growth really takes off again somewhere they won't stay at this level for long), and equally importantly, despite the fact that Trichet promises to be extremely vigilant (although in December he was perhaps promising this a little less forcefully than he had been) the markets appear to be taking the view that the better part of this raising cycle may now well be over, and the real debate is moving to how soon rates in the OECD world will come down, and when they do do so, how fast will they fall.
Obviously Japan is going to be a key test case here, since if the BoJ cannot raise, or can only manage a belated token quarter point, the implications will be quite significant. While the jury is still out, noone seems to anticipate any large raise in the foreseeable future.
So where does that leave us? Well back with the attractiveness of emerging market debt, that's where it leaves us.
Analysts attribute the bullish performance in emerging markets to strong demand by investors hungry for yield. The class has become attractive as economies have improved in recent years, partly on the boom in commodity prices.
Now this last, lone little paragraph, in fact contains three very important points:
a) Pension funds are growing, so the need to find better yield than US treasuries only grows with them. As I keep saying I think low yield rather than the meltdown of anything is going to be the big pensions issue.
2) Emerging markets are growing as a whole slew of countries pass through their Demographic Dividend, while the low fertility culture spreads even faster than anyone ever imagined (globalisation and behavioural changes).
c) The commodities countries ride on the back of the other two, but again there are even more feedback mechanisms at work
So the big point is, if interest rates in the developed world start to trend down, then interest payments in India (and elsewhere) will also do so, which will indirectly aid productivity growth, since effectively capital deepening will get cheaper, apart from all those funds flooding in hungry for yield.
Now one last issue occurs to me, but this is more in the form of a question than anything. Thinking about it, isn't there a danger of this whole thing tipping over at some point, or at least of a tipping point being reached?
I mean, lets imagine that investors are not totally stupid, and that they do want to make money (innocent enough assumptions I would think).
So, even with all the froth, property in Delhi and Shanghai has certainly got a lot more to offer over the next 10 to 15 years in the way of return than property in Barcelona or London. Not only that, the respective currencies are going to rise significantly (Brad is certainly right here, Bretton Woods II is not sustainable indefinitely in these circumstances). On top of this a big chunk of the emerging world is now about to become a sure bet. I mean the risk of instability could be much greater in Italy or Japan in a not too distant future. So when markets finally wise up to this posibility, what the hell is going to happen? Could we see a higher risk premium being demanded for some developed economies? And if this outcome were to happen, just how far are we away from such a point?
One last untimely thought: what would be really interesting would be to understand the social/economic mechanisms by which India and China got to have such a large population, and what connection (if any) did this population explosion have with the early rapid growth of the now developed world. After all it is the sheer size of these two countries which now is going to produce all the turbulence, and while all that anti-imperialist stuff we still hear about in India may be just so much nonsense, there may actually be feedback mechanisms to be identified somewhere along the line here. I mean it may be more than mere coincidence that some get caught in a poverty trap that produces only children while others take off, but if there is a mechanism, what the hell does it look like?
Risk premiums for emerging market bonds fell to match their record low on Wednesday, only two days after the shock imposition of capital controls in Thailand reminded investors of the potential risks associated with the sector.
Investors measure the risk of emerging market debt by comparing their yields with those of US Treasuries, seen as the safest sovereign bonds. As measured by JPMorgan’s EMBI+, a benchmark indicator, that spread fell on Wednesday to 172 basis points – one basis point is equal to 1/100th of a percentage point – over US Treasuries, equalling a record low hit last in May.
So we are back where we were in May: before Iceland, Turkey, Hungary etc.
And why, may we ask, is this? Well, first of all let's look at this problem the other way round: why did they start to widen in the first place?
The EMBI+ last reached a record tight level of 172bp on May 1. The spread subsequently widened to 238 basis points by June 27, as investors worried that central banks were poised to tighten monetary policy more aggressively as oil prices approached $80 a barrel.
So we need to think about two things, oil prices and central bank tightening. Well oil prices have now stabilized somewhat (although if growth really takes off again somewhere they won't stay at this level for long), and equally importantly, despite the fact that Trichet promises to be extremely vigilant (although in December he was perhaps promising this a little less forcefully than he had been) the markets appear to be taking the view that the better part of this raising cycle may now well be over, and the real debate is moving to how soon rates in the OECD world will come down, and when they do do so, how fast will they fall.
Obviously Japan is going to be a key test case here, since if the BoJ cannot raise, or can only manage a belated token quarter point, the implications will be quite significant. While the jury is still out, noone seems to anticipate any large raise in the foreseeable future.
So where does that leave us? Well back with the attractiveness of emerging market debt, that's where it leaves us.
Analysts attribute the bullish performance in emerging markets to strong demand by investors hungry for yield. The class has become attractive as economies have improved in recent years, partly on the boom in commodity prices.
Now this last, lone little paragraph, in fact contains three very important points:
a) Pension funds are growing, so the need to find better yield than US treasuries only grows with them. As I keep saying I think low yield rather than the meltdown of anything is going to be the big pensions issue.
2) Emerging markets are growing as a whole slew of countries pass through their Demographic Dividend, while the low fertility culture spreads even faster than anyone ever imagined (globalisation and behavioural changes).
c) The commodities countries ride on the back of the other two, but again there are even more feedback mechanisms at work
So the big point is, if interest rates in the developed world start to trend down, then interest payments in India (and elsewhere) will also do so, which will indirectly aid productivity growth, since effectively capital deepening will get cheaper, apart from all those funds flooding in hungry for yield.
Now one last issue occurs to me, but this is more in the form of a question than anything. Thinking about it, isn't there a danger of this whole thing tipping over at some point, or at least of a tipping point being reached?
I mean, lets imagine that investors are not totally stupid, and that they do want to make money (innocent enough assumptions I would think).
So, even with all the froth, property in Delhi and Shanghai has certainly got a lot more to offer over the next 10 to 15 years in the way of return than property in Barcelona or London. Not only that, the respective currencies are going to rise significantly (Brad is certainly right here, Bretton Woods II is not sustainable indefinitely in these circumstances). On top of this a big chunk of the emerging world is now about to become a sure bet. I mean the risk of instability could be much greater in Italy or Japan in a not too distant future. So when markets finally wise up to this posibility, what the hell is going to happen? Could we see a higher risk premium being demanded for some developed economies? And if this outcome were to happen, just how far are we away from such a point?
One last untimely thought: what would be really interesting would be to understand the social/economic mechanisms by which India and China got to have such a large population, and what connection (if any) did this population explosion have with the early rapid growth of the now developed world. After all it is the sheer size of these two countries which now is going to produce all the turbulence, and while all that anti-imperialist stuff we still hear about in India may be just so much nonsense, there may actually be feedback mechanisms to be identified somewhere along the line here. I mean it may be more than mere coincidence that some get caught in a poverty trap that produces only children while others take off, but if there is a mechanism, what the hell does it look like?
Wednesday, December 20, 2006
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.
“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.
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