Japan Real Time Charts and Data

Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Japan related comment. He also maintains a collection of constantly updated Japan data charts with short updates on a Storify dedicated page Is Japan Once More Back in Deflation?

Wednesday, December 28, 2011

Japan decided to enter the military arms market

The FT reports that "Japan relaxes weapons export ban", stating that
"Tokyo has relaxed a decades-old ban on arms exports, opening the way for Japanese companies to participate in the international development and manufacture of advanced weapon systems."

This is clearly a move to bolster the country's manufacturing sector and avoid current account deficits, as China's economy has slowed down.

It appears that Japan's economic and budgetary problems are beginning to break down domestic resistance to significant policy changes. Further major changes are likely, although the timing is difficult to predict.

There is still internal resistance to increasing taxes to help with the national budget:

DPJ members bolt party on Noda tax plan | The Japan Times Online

"In a show of defiance against Prime Minister Yoshihiko Noda's policies, in particular a plan to raise the consumption tax, nine Democratic Party of Japan lawmakers submitted their resignations Wednesday to protest Noda's leadership."

Entering a new market, however distasteful, appears to be more appealing to the Japanese public than increased taxes.

Friday, October 28, 2011

Elderly Japanese control most of that country’s savings

According to a BusinessWeek article from 2000 Japan, a Nation of Risk-Takers? (int’l edition)
Seniors aged 60 years and over own about 70% of Japan’s $11 trillion in household financial assets. Only 9% of that is directly invested in stocks and a mere 2% in mutual funds.”

Eleven years later should mean that Japanese 71 and over hold 70% of $11 trillion or $7.7 trillion in household financial assets. As these individuals pass away, a significant amount is likely to be passed down to heirs. Japan has an inheritance tax that ranges from 10% to 50%; perhaps the Japanese government will realize a tax windfall from the inevitable.

It seems unlikely that elderly Japanese will start cashing out their savings and increasing their spending as the inevitable approaches.

Since much of this savings is held in the form of Japanese government debt, inheritance taxes might reduce the country’s total government debt level.

Sunday, July 31, 2011

Is Japan In Danger Of A Deflation Relapse?

"Japan’s V-shaped recovery has now become a statistical fact rather than our forecast. According to retail sales statistics, the level of retail sales in June has already exceeded the level prior to the disaster. Sales of general merchandise and apparel have recovered and replacement demand for vehicles and reconstruction demand for household equipment have lifted sales of these items to above their levels of February".
Takuji Okubo, Societe Generale (see note below).

Is Japan really, as Tukuji Okubo suggests, having a "V-shaped" recovery? On some measures this assertion would be hard to justify, but then, at the end of the day, perhaps it all depends what you mean by "V-shaped" and what you mean by recovery. Obviously, as he suggests, retails sales have just bounced back to a point above where they were when the tsunami hit (see chart below), but look what had been happening to them in the months prior to the disaster. Sales had been losing momentum ever since mid 2010, as had the rest of the Japanese economy. It is well worth reminding ourselves at this point that Japan entered recession (that is had the second of 2 quarters of eceonomic contraction) in the first quarter of 2011 because it had already contracted in the last quarter of 2010. So evidently it is not so hard for the economy to recover to its February point of departure. The more interesting question to ask might be what happens next? If the economy was weak in February, and a global slowdown is now in the works (a slowdown with a financial dimension which exerts constant upward pressure on the yen), then at some point might the next move not be down rather than up?

As we know, Japan's is an export dependent economy, so more than retail sales it is external demand that matters, and as we also know global demand is slowing at this point, which makes things more, and not less, difficult for Japan.

Industrial output has recovered to some extent, but in June it was still 5% below the February level, and nearly 16% below the pre-recession high.

And while the July manufacturing PMI showed that the sector continued to expand, the expansion was only moderate. More significantly new export orders fell for a fifth successive month, with survey respondents mentioning the fall in China and the US in particular.

And if we look at the present level of Japanese exports, we can put this "V-shaped" recovery in some sort of perspective, since in June the level of exports was down 19% from the June 2008 level (ie the level of 3 years ago).

Exporters are dependent on demand for their products elsewhere, and as we can see, demand for Japanese products in the US has remained well below the pre-crisis level.

We find a similar picture as regards exports to Europe, and it is evident that the problem goes back well beyond the recent natural disaster.

More worryingly, exports to China are now stagnating, and here the issue is clearly not absence of potential demand (since German exports to China have been booming) but price, and the recent high values of the yen.

And if we move beyond retail sales (which evidently had a very good month in June) and take a broader look at consumption in the economy, then we find that (according to statistics office date) household spending was still down 4.2% in real terms in June over a year earlier:

While gross income in worker households was down 6.7% over June 2010. So there is still a long way to go on the income side before we can expect a real deman recovery.

The broader weakness in consumer spending was also revealed in the June services PMI, which once more showed quite strong contraction.

Which brings me back to the main point of this post, what are the dangers of Japan slipping back into deflation at this point? The Japanese price indexes had, as was the case in 2008, being moving back into positive territory interannually on the back of the surge in commodity prices, but now, with the global economy slowing, there are clear signs that inflation is heading down again, and the ex-food and energy register only rose 0.1% over a year earlier in June, which is to say by September/October we could easily be back in negative territory again.

This view is reinforced if we look at the price component in the manufacturing PMI, since while input costs were again up sharply in July, they rose at the slowest pace in six months. On the other hand the survey found that the rate of output price inflation was only modest, since capacity issues and competitive pressures continued to restrict firms’ pricing power.

As will be remembered, deflation represents a serious problem for any country with a serious sovereign debt problem, since weak economic growth and price declines can mean sustained periods of nominal GDP shrinkage which simply sends the level of debt to GDP spiralling upwards, as we can see has happened in the Japan case.

For many this problem in Japan is benign, since domestic Japanese savings finance the debt, and this may well be the case for as long as Japanese home bias and the current account surplus can be guaranteed, but if either of these things go then the rate of interest which might need to be paid to attract capital could quickly make the debt dynamics unsustainable. Simply put, Japan cannot afford to "normalise" in the sense of having "normal" rates of interest and low inflation, and this fact alone should be worrying people.

Which brings us back to the starting point in the present piece: the "V-shaped" recovery in Japanese retail sales. While attention this week has been largely focused on debt sustainability in the United States, it should not escape our notice that Japan’s government chose the end of last week to make public plans to spend a minimum of Y19,000bn over the next five years and up to Y23,000bn over the coming decade in order to carry out the reconstruction of the disaster-struck north-eastern coast. There was, however, one deeply significant detail about the plan as presented, and that was that no information was provided on how this pretty significant increase in spending was going to be paid for. Despite earlier speculation no information was included on tax increases which might be implemented to fund the spending. It seems no agreement was possible within the ruling Democratic Party of Japan on the issue.

Earlier proposals had called for emergency tax increases of about Y10,000bn ($130bn), including an increase in income tax and a rise in corporate taxes, to fund reconstruction. But fierce opposition to such tax increases from within the ruling DPJ is said to have made agreement on this impossible. Just as significantly, little progress has been made on the proposal to increase the consumption tax (currently 5%) in order to reduce the mountain of debt, which is perhaps not so surprising since evidently such an increase would quickly bring to an end the current "V-shaped" surge in retail sales.

All in all, the phenomenon is very reminiscent of something which is currently going on out there, over on the other side of the Pacific, raising the possibility that the United States may not the only non-European country currently running the risk of having a credit downgrade in the non too distant future.


NB, I certainly wouldn't like it to give the impression that I am in any way singling out Takuji Okubo for special criticism here, his report was simply the first I read, and the argument caught my attention, in fact his optimistic assesment of the Japan situation is pretty widespread among bank analysts at this point. The argument advanced in my post is simply an extension of what I have been arguing since the tsunami tragedy hit the country. See Japan’s Economy Struggles For Air (May 6th, 2011) and "Surely There Is Nothing “Funny” About What Is Going on in Japan?" (March 21st, 2011).

This post first appeared on my Roubini Global Econmonitor Blog "Don't Shoot The Messenger".

Wednesday, July 06, 2011

Japan riddled with toxic waste sites

Alex Kerr, in the book Dogs and Demons, documents how Japan has “only the most primitive regulation of toxic waste” (p. 57), and for comparison describes how “There are more than a thousand controlled hazardous substances in the United States” where as in Japan “only a few dozen substances were subject to government controls” (p. 58).

Further, “Japanese laws do not call for environmental-impact studies before towns or prefectures approve industrial projects. In having no environmental-impact law, Japan is alone among the twenty eight members of the…OECD”. (p. 58)

Kerr goes on to describe how Japan’s “industrial policy factored waste treatment out of the equation. There are few legal or monetary costs for poisoning the environment, and Japanese companies have consequently felt no need to develop techniques for handling wastes”. (p. 65)

A United Nations document backs up this analysis, stating that:

“In the 1970s the production of iron and steel along the shores of the Inland Sea reached 70 million tons, an amount equal to that produced by France and the United Kingdom combined. Daily processing of petroleum reached over 1,600,000 barrels, equal to the production levels of the United Kingdom. Petroleum chemistry brought the production of 1,800,000 tons of ethylene annually, with this also equalling British output. The Inland Sea has an area of about 17,000 square kilometres, which is about the same size as Lake Ontario, the smallest of the five great lakes in the USA. All of this production capacity was concentrated in this area and, in the 1960s, pollution-prevention technologies were very little used; as a result the problems of air and water pollution were serious in the extreme. In the case of Tokyo Bay, an area which is one-tenth the size of the Inland Sea, the production of ethylene from the concentrated petrochemical industries was 1,500,000 tons annually, which is very close to the total production in and around the Inland Sea.”

The UN report continues noting that:

“corporations, local and national governments, and city administrators lacked the wisdom and understanding necessary to prevent serious environmental problems. During the high-economic-growth period, production efficiency was the primary concern in the uncritical and rapid adaptation of new technologies. This stance resulted in unprecedented damage to natural ecosystems and to human health and well-being.”

One aspect of Japan’s rise to industrial competitiveness with the USA can reasonably said to have been the avoidance of environmental protection costs. It was certainly difficult for American manufacturers required to incorporate the costs of waste handling into their product prices to compete with Japanese equivalents.

China is operating with a model similar to that of Japan; that is to say it is ignoring the costs of rampant environmental and health destruction in order to maintain export levels to the rest of the world.

Tuesday, June 28, 2011

Prospects for dissaving in Japan and inheritance tax

In the book "Dogs and Demons: Tales from the Dark Side of Japan", Alex Kerr notes that Japan has very high inheritance taxes relative to other developed countries. This could be a significant factor in Japan's public and private economic future, as larger numbers of Japanese pass away leaving substantial savings from their estates.

BusinessWeek identified the issue back in 1999 in an essay "Commentary: Inheritance Taxes Are Draining Japan's Lifeblood", providing examples of how this is a problem. The essay explains that:

"Many small and midsize companies cannot afford to expand and keep up with tax payments at the same time. Yet many cannot sell assets, since potential buyers are also scarce. And as Japan's population ages, more entrepreneurs are frustrated at their inability to hand their businesses over to their children without also sentencing them to lifetimes of tax payments."

and yet
"the government relies on inheritance taxes for $18 billion annually, or 4% of its budget, which runs a large deficit".

More recently (April 2011), researchers pointed out that the inheritance tax is still an issue:

"With its rapidly aging society, nowhere is inheritance tax more important than in Japan. Over the past decade, an unexpected segment of Japan’s population has been impacted. Although originally aimed at the wealthy, inheritance tax now impacts regular Japanese salary men and retirees who own land and whose other assets’ value has nominally increased over the years. The inheritance tax bill often comes as a shock to the heirs. As a result, any change to Japan’s inheritance tax regime is important not only to the wealthy, but also to the average Japanese homeowner."
Apparently reforms are being discussed in Japan's legislative body that would:

"promote the transfer of trillions of yen from the nation’s conservative, money-conscious elderly to the free-spending younger generation.

Beginning in April 2011, a reduction in the inheritance tax exemption will be effectively coupled with a change in the gift tax regime. The policy change would see a significant rise in inheritance tax, as well as a reduction of gift tax by almost half. This makes it attractive to give money away now, instead of waiting and having a future inheritance taxed at higher rates. The essence of the tax reform is encouraging elderly Japanese to gift their assets now instead of waiting to bequeath it in a will. As an economic stimulus measure, the success of this plan hinges on a hope that the younger generation will open their wallets and spend more freely than their savings-conscious parents or grandparents."

This is dis-saving as a policy tool. It is an open question whether reforms will take place and if so whether the impact will be significant to Japan's overall economy.

Friday, May 20, 2011

Recession returns

Japan's economy has fallen into recession again with two consecutive quarters of negative GDP growth. Gross domestic product contracted 0.9% during the January-March quarter, marking a 3.7% annualized drop, the Cabinet Office reported Thursday. A drop in domestic demand took 0.8 of a percentage point off growth last quarter. Business investment fell 0.9% and consumer spending declined 0.6%. GDP shrank a revised annualized 3.0% in the October-December period. Clearly the earthquake/tsunami/nuclear crisis had a major impact in Q1 2011, but it is intriguing that the drop in that quarter was not that much greater than in Q4 2010. It is very possible that the Q1 figure will be revised to an even greater decrease.

The eastern half of the country will have to deal with severe electricity shortages for quite a while, as electric power is difficult to shift from other parts of the country due to incompatible transmission systems as shown in this chart of the country's power grid from Wikimedia:

The New York Times nicely summarizes the impact of such shortages:

"Besides the dangerously disabled Fukushima Daiichi nuclear power plant, three other nuclear plants, six coal-fired plants and 11 oil-fired power plants were initially shut down, according to PFC Energy, an international consulting firm.

By some measures, as much as 20 percent of the total generating capacity of the region’s dominant utility, the Tokyo Electric Power Company — or an estimated 11 percent of Japan’s total power — is out of service.

Until all the lost or suspended generating capacity is replaced, economists say, factories will operate at reduced levels, untold numbers of cars and other products will go unbuilt and legions of shoppers will cut back their buying "
The power shortages may last quite a long time; some experts are predicting that
Japan's shortage of electricity may last two or three years and that production slowdowns will continue in many sectors such as automotive, semiconductors, electronics, special chemicals, machinery, and precision equipment. This seems likely to reduce the chances that GDP growth in Q2 2011 will be positive year on year.

In addition, it appears that turf battles and government inertia are hobbling the cleanup effort: Focus on local firms slows debris removal : National : DAILY YOMIURI ONLINE (The Daily Yomiuri)
"More than two months after the Great East Japan Earthquake, piles of debris created by the ensuing tsunami remain untouched throughout disaster-hit areas.

Municipal governments have consigned most removal work to local companies, a practice that disaster-management experts say is delaying cleanup efforts. Calls are increasing for the central government to play a more active role and for the debris to be removed more quickly."

It seems to me that the Japanese government has nothing more than ad-hoc responses to this crisis. They've never had any meaningful control of the nuclear crisis since day 1. There are too many simultaneous problems causing cascading additional problems. Their deliberative style of decision-making is a poor fit for a crisis that requires prompt action.

Tuesday, May 03, 2011

Japan's Economy Struggles For Air

With the arrival of the first real Japanese data since the Tsunami struck the immensity of the tragedy which Japan is passing through is only now gradually becoming apparent. Exports were down by a seasonally adjusted 7.7% in March over February, while imports were only fell by a much more modest 1.4%, with the inevitable consequence that the trade surplus which forms the lifeline for Japan's fragile economy shrank sharply. In particular car production was badly hit, with output at Toyota plunging 62.7% during the month, while Nissan reported a drop of 52.4% and Honda put the shrinkage in its Japanese domestic production at 62.9% adding that output would be at 50 percent of its former projections until at least the end of June.

In fact March output across the whole of Japanese industry fell at a record monthly pace of 15.3%, while household spending declined at the record annual rate of 8.5%.

Large as they are, however, these numbers were to some extent expected. More worrisome from the Japanese point of view is the fact that production may be many months getting back to earlier levels given supply chain problems and the fact that electricity generating capacity will remain problematic, leading to reductions in the level of power available. These delays in restoring production in Japan’s auto industry at a time of substantial economic growth in potential new markets raise the prospect that some of the damage may be permanent, as some part of the Japanese market share goes to the country’s main competitors. Indeed just this point was raised by S&Ps recently when they cut their outlook to negative for all three manufacturers along with suppliers Aisin Seiki, Denso, and Toyota Industries. In their report justifying the move S&P’s stated "The outlook revisions also reflect our opinion that extended production cuts may erode Japanese automakers market shares and competitive positions in the longer term."

Among companies who may well inadvertently benefit from Japan's ill fortune is the US company General Motors, who less than two years after declaring themselves bankrupt now seem poised to reclaim the global auto sales number one spot from their struggling rival Toyota. Japan's car manufacturers have also been hurt by the sharp rise in the value of the yen. After years of a weak yen boosting sales and corporate profits, the Japanese currency has steadily strengthened to 81 yen to the dollar from 112 at the end of 2007. What might have been seen as a temporary development now looks much more permanent, and strategic planning by Japanese corporates will undoubtedly be influenced by this when it comes to decisions on where to locate new plant and capacity. And in the meanwhile, they stand to loose market share in both the US and in the key growth market, China.

German manufacturing is also an indirect beneficiary of Japan's ills, and the German April manufacturing PMI once more revealed a very strong performance, underpinned by ex-European demand for capital and intermediate goods.

Obviously the substantial under-performance will continue, as was confirmed by the April manufacturing PMI which showed a second month of sharp contraction, with the indicator registering 45.7 reflecting a deterioration on the already sharp contraction (46.4) registered in March (50 marks the neutral, or no change mark on these indexes). And while after years of deflation and slow growth Japan’s economy may not be what it used to be, it is still the world’s third largest economy, so it should not surprise us if JPMorgan attributed a large part of the fall in their March Global Composite PMI (to a six monthly low of 54.7) to the Japan impact. Without the contraction in Japan, they suggest, the Global Output Index reading would have been in the region of 57.3.

On the other hand, since Japan is an export surplus country, and it is highly likely that the slack left by Japan’s export losses will be taken up by its main competitors, beyond a short-lived supply chain blip there is unlikely to be any major impact on Global economic growth in 2011 following from the disaster. The problem here is very much a Japanese one.

We also now have details of the first instalment of money allocated by the government for the reconstruction programme. As expected the initial spending is modest in relation to the extent of the damage, with an emergency budget of 4 trillion yen ($48.5 billion) while total costs have been estimated as lying more in the region of $300 billion. Further, the government have been at pains to stress that no new debt will be issued to cover this spending, and that the resources will be found from cuts in social programmes and from pension fund resources. In fact the package has been financed using 2.5 trillion yen from the country's pension funds plus money originally intended to increase payments to families with children. Ironically this money had been promised as part of a campaign to try to address the country's long term demographic shortfall, which is now playing a key role in generating the country's evident economic imbalances. In any event, these are hardly "stimulus" measures, although paying for the next round of reconstruction will be much harder without recourse to a new debt issue.

Significantly, no decision seems yet to have been taken on whether to increase consumption tax, since given the ongoing weakness in Japan domestic consumption the application of such a remedy in the current environment may create as many issues as it resolves. The reticence of the Japanese authorities to raise new debt is comprehensible given the fact that the IMF estimates that gross government debt will hit 229% of GDP in 2011 (and net government debt 128%) while the rating agencies are waiting in the wings waving imminent downgrade warnings. Subsequent packages are likely to prove far more challenging in terms of financing, and markets are liable to remain nervous.

It is now more or less universally acknowledged that Japan is in recession, and Bank of Japan governor Masaaki Shirakawa has confirmed this impression by asserting the Bank’s view that the economy will continue to contract throughout the first half of the year. In fact only last Saturday he described the country's economic outlook as "very severe" and asserted that the central bank was resolute in its determination to take appropriate action to support the economy. Most observers interpret this as meaning that the bank will ease further by increasing its asset purchase programme. The BOJ eased policy in the days following the tsunami by doubling to 10 trillion yen the funds it sets aside for purchases of a range of financial assets, such as government bonds and corporate debt, and despite the fact that a proposal from Deputy Governor Kiyohiko Nishimura to expand the programme by 5 trillion yen ($62 billion) was outvoted by the board, the mere fact it was discussed could mean that bank could loosen policy further as early as next month.

It is important to bear in mind that Japan’s recovery from the global crisis was always fragile, and that while post-Lehman growth resumed in Q2 2009, the economy contracted again in Q3 2009, and suffered a further relapse in Q4 2010. At the end of last year economic activity in Japan was still at the same level as in Q1 2006, and the short term impact of the Tsunami will only have served to blow it further back in time.

Thus while it seems pretty clear that growth in Japan will resume in the second half of the year, and that the rebound in manufacturing industry will be pronounced once a normal power supply is restored, the thesis that natural disaster shocks are invariably good for economies with a lethargic track record of pronounced under-performance seems rather questionable. It is entirely possible that Japan will turn into a reference-case-example of a country where this does not happen (particularly given the major differences in the demographic profile between Post WWII Japan and the country today). In addition, while additional government indebtedness and burden sharing from the private sector may well be short term growth positive, the stimulus will be short lived, since what Japan needs is not a “one off” push start, but major structural changes and in particular a new openness to immigration. Further down the road only lie major tax increases (which will surely slow the domestic economy even further) or (ultimately)debt restructuring, since surely, even in the Japan case, the sky is not the limit for sovereign debt, and while any Japan sovereign restructuring would have little external impact given that the Japanese are the main holders of their own debt, Japan's banks (who hold the lion's share) would hardly escape unscathed. But beyond immediate government debt-woe issues, the big question is the extent to which lasting damage is being done to demand for Japanese home-grown products, and whether or not this will make it more rather than less difficult to sustain in the longer term the external surplus the country so badly needs to underpin its fiscal survival.

Monday, April 04, 2011

Global Manufacturing Slips Back Slightly In March

Evidence which would enable us to assess the full economic impact of the Japanese earthquake and tsunami is still hard to come by. There is a lot of talk of supply chain disruptions, but little in the way of detailed evidence to back up assertions of the more anecdotal kind. Even the latest set of manufacturing PMI data has decidedly left the jury out on the topic.

Evidently in Japan there was a clear and substantial drop in activity, but that was only to be expected . The Japanese March PMI slumped to a two-year low of 46.4, down from February’s reading of 52.9, the largest one month drop on record.

Commenting on the Japanese Manufacturing PMI survey data, Alex Hamilton, economist at Markit and author of the report said:

“March PMI data provide the first indication of how output at small, medium and large sized Japanese manufacturers was affected by the events following the Tohoku earthquake on 11 March. The PMI slumped to a two-year low, suffering the largest monthly fall in points terms since the survey began in 2001, exceeding the drops seen after 9/11 and the collapse of Lehmans. The latest index reading is consistent with a decline in Japanese industrial production of around 7.0% on a 3m/3m basis".

“Suppliers’ delivery times lengthened at a survey record pace amid widespread disruption in the supply chain resulting from the disaster. These delays could affect production in coming months and drive input price inflation even higher than the two-and-a-half year peak seen in March.”

At the same time it is hard to disagree with this conclusion, presented by Nomura economist Richard Koo in a recent report on the subject:

Any analysis of Japan's position vis-à-vis the rest of the world needs to start with the question of whether Japan was running a trade surplus or deficit. A trade deficit implies the world has lost a customer: ie, demand: whereas a surplus would mean the world has lost a producer, namely, a supplier of products and intermediate goods. Inasmuch as Japan boasts the world's third-largest trade surplus after China and Germany, I think the world has lost an important supplier.

Supplier countries' products are typically in demand for one of two reasons: either they are cheap or they are essential. A key to distinguishing between the two is the exchange rate. When a nation's currency is cheap relative to those of its trading partners, its exports tend to fall into the first ("cheap") category, whereas exports from countries with a fully or over-valued currency tend to fall into the second ("essential") group.

The Japanese yen has been the strongest currency in the developed world since the Lehman-inspired financial shock. Its strength was reaffirmed when it surged into the Y76-77 range against the US dollar in the wake of the earthquake. Japan has continued to run one of the world's largest trade surpluses in spite of an extremely strong currency. Inasmuch as this is evidence that there are many businesses around the world that must buy Japanese products regardless of the cost, I suspect that many of Japan's exports cannot be easily substituted.

But elsewhere, at least on the surface, there was little sign that companies were being held back by any substantial shortage of components.

Digging a little deeper, while manufacturing output strength weakened slightly from February, survey respondents still indicated companies were raising output rapidly. On the other hand it is hard to sort the wood from the trees here, since global output could weaken for any of a number of reasons, most of them nothing whatsoever to do with Japan.

More significantly, manufacturing activity did slow in South Korea, and failed to really recover in China following the end of the new year holiday season. These two countries are among the most closely integrated with the Japanese economy.

Commenting on the China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:

“The Final March manufacturing PMI confirmed that the pace of manufacturing expansion has stabilised after slowing in February. This implies economic growth is only moderating rather than slowing too much. More importantly, price hikes also started to slow in March. All these confirm our view that quantitative tightening is working. So as long as Beijing keeps tightening for another three to four months, inflation should start to slow meaningfully in 2H2011.”

On the other hand, there has been plenty of earlier evidence that the Chinese economy may now be slowing somewhat, and this for its own domestic reasons. So it is hard to know what is attributable to a Japan impact here, and what isn't.

Certainly it does seem that economies in Asia are now slowing somewhat, and since the region has been one of the main drivers of the global economy, then this slowing will be noticed in those economies which are most dependent on exports.

Curiously, both in Europe and in China the final PMI reading was below the initial flash estimate, which could suggest that problems mounted a bit as the month advanced, with those responses which came in later being slightly less optimistic.

Either way, the big issue isn't the supply chain disruption one - since lost output can (in general) be quickly recovered in this context, especially given the degree of surplus capacity which still exists in the global manufacturing system - rather the question is one of where exactly we are in the current global cycle?

Many Emerging market economies have plenty of scope for continuing rapid expansion, as long as the markets are still willing to fund them. And risk sentiment doesn't seem to be an issue at the moment, although forthcoming monetary policy decisions at central banks in both the developed and the developing world make the mid term outlook rather more uncertain than it was six months ago.

Commenting on the India Manufacturing PMI survey, Leif Eskesen, Chief Economist for India & ASEAN at HSBC said:

"The momentum in India's manufacturing sector held up well in March, suggesting that growth is not an immediate concern. Output growth kept up the pace and the inflow of new orders accelerated, holding promise of a continued strong momentum in output in the months ahead. However, capacity constraints are tight as reflected in the increase in the backlog of works. Also, manufacturer's are facing ever steeper increases in input costs due to tight labour markets and rising material costs, which are increasingly being passed on to output prices. In turn, this calls for further tightening of monetary policy to tame inflation pressures."

Commenting on the Turkey Manufacturing PMI survey, Dr. Murat Ulgen, Chief Economist for Turkey at HSBC said:

“Turkish manufacturing sector performance eased somewhat in March from its record high level in the previous month, though it still remained comfortably stronger than past averages. The slight slowdown in the rate of expansion was caused by output and new orders, both of which also expanded at slightly lower, but still markedly strong rates. There was a solid slowdown in new export order growth, possibly reflective of uncertainties in the Middle East & North Africa region, while backlogs of work fell despite the weaker expansion of output. Employment conditions continued to improve as manufacturers continued to hire more workers to meet robust demand and production. There was a slight decline in stock of purchases in March due to shortages of raw materials, as reported by survey participants, that was also evident in the continued lengthening of supplier delivery times. While both input and output prices rose at slower rates than in February, they both continued to signal pipeline inflationary pressures in the manufacturing industry.”

In the Eurozone,where the headline PMI slipped from 59 in February to 57.5, the results followed a now familiar pattern, with Germany, France and Italy all showing quite robust expansions, while Greece, Spain and Ireland continue to struggle, even if in each case the performance was an improvement on earlier months. Of the three, only Greece continued to show a contraction in activity, even if this was at a slower rate than previously.

Chris Williamson, Chief Economist at Markit said:
“The Eurozone’s manufacturers continued to report buoyant business conditions in March. Despite the slight easing since February, the data are consistent with industrial production growing at a quarterly rate of 2%, spearheading the region’s recovery.

“National divergences are marked, however, with surging output growth driving record job creation in Germany, while weak or falling production led to ongoing job losses in Spain and Greece.

“The record jump in average prices charged for goods will further encourage the European Central Bank to increase interest rates sooner, rather than later, which may drive further divergences among member states as higher borrowing costs hit already weak demand in the periphery.”

Commenting on the final Markit/BME Germany Manufacturing PMI survey data, Tim Moore, senior economist at Markit and author of the report said:

“German manufacturing growth cooled during March, but the latest figures confirm an exceptionally strong performance for the sector across Q1 2011 as a whole. Firms continued to benefit from steep gains in inflows of new business during March, helped by the fastest expansion of export orders for ten months.

“The survey’s fifteen-year anniversary was marked by a series record rise in manufacturing employment levels, as firms continued to step up production capacity in response to steep improvements in order books.

“March data indicated higher levels of purchasing and stocks of inputs, reflecting concerns about lengthening supplier delivery times as well as greater production requirements. Strong global demand for raw materials was cited as the primary reason for supply chain delays, and only a small proportion of the survey panel cited the earthquake in Japan.

“Surging raw material and transportation costs meanwhile meant that factory gate price inflation accelerated to a level last seen in the wake of the January 2007 VAT rise.”

Commenting on the Spanish Manufacturing PMI survey data, Andrew Harker, economist at Markit and author of the report, said:

“The latest PMI survey indicated a continuing divergence between demand in domestic and foreign markets, with the latter proving the main source of new order growth. Meanwhile, a record rise in output prices was recorded, although the rate of charge inflation remains much weaker than that seen for input costs as firms struggle to fully pass on price rises to clients.

Phil Smith, Economist at Markit and author of the Greece Manufacturing PMI said:

“Waning domestic and international demand for Greek manufactured goods continued to hurt the sector during March. Crucially, firms were left with little choice but to absorb sharp input price inflation and find savings elsewhere. To some extent, this came in the form of rapid stock depletion. Hope, however, might be taken from the fact that business wins by surveyed firms fell at the slowest rate for ten months.”

But the issue this raises is that the global economy must now be getting somewhere near the peak of this cycle, at least in terms of manufacturing activity. Central banks across the globe are moving into tightening mode, and much of the low lying fruit has now been eaten, so the issue for the fragile economies on Europe's periphery (who are now totally dependent on movements in demand elsewhere for growth) is how they will fare, not during the highpoint, but as and when the current expansion slows.

In the US, the PMI index, compiled by the Institute for Supply Management, edged down from 61.4 in February to 61.2 in March, but stood at a level close to a 27-year high.

Norbert Ore, chairman of the ISM, said “the component indexes of the PMI remain at very positive levels and signal strong sector performance in the first quarter”. Despite the positive result this month, doubts remain about where exactly we are in the cycle at this point. Danske Bank's Signe Roed-Frederiksen thinks we may be near the peak, which doesn't mean a collapse in activity, but simply that from this point the rate of expansion may slow:
US ISM manufacturing declined from 61.4 to 61.2 in March. This was marginally higher than consensus expectations of 61.0 and our estimate of 60.7. However, details of the eport suggest that the ISM will continue lower over the coming months.

New orders dropped to 63.3 from 68.0 and although inventories declined as well, the drop was more modest. This means that the two order-inventory differentials declined further and continue to signal a downward correction in the ISM index. The ‘new orderscustomer inventory’ differential, which has proven the most reliable on short-term movements, suggests the ISM should decline to around 57. The ‘new orders-inventory’ differential suggests a more pronounced slowdown to 56.

New export orders weakened to 56.0 from 62.5 possibly reflecting the slowdown in Asian growth while supplier deliveries increased to 63.1 from 59.4, indicating a slower pace of deliveries. Prices paid rose further to 85.0 from 82.0 reflecting the increase in commodity prices and upward pressure on input prices.

That said, even a moderate decline from the current level would still leave the ISM index at a healthy level.

Globally, the headline PMI reading was 55.8, well above the historical average and the level of 50 that attempts to separate expansion from contraction, But down from the 57.4 registered in February, largely as a result of the slump in activity in Japan.

As David Hensley, economist with JPMorgan, put it: “There was little visible sign of supply-chain disruptions in the March surveys, but this effect is likely to be more visible in Asian emerging markets in April.”

The main concern expressed by the authors in their monthly report referred to the inflationary threat coming from a rapid rise in the prices of inputs and evidence that manufacturers were passing these on. Certainly, in this sense, the report will do little to deter decision makers at the ECB from raising interest rates when they meet on Thursday.

Saturday, March 19, 2011

Surely There Is Nothing “Funny” About What Is Going On In Japan?

As Japanese officials continue to toil away in what we all hope will be a successful bid to avert a worst case scenario nuclear meltdown even while thousands of Japanese still remain missing and unaccounted for, financial market participants across the globe have been struggling with themselves to answer one and the same question: just how serious are the economic consequences of all this devastation likely to be?

Basically, the economic issues raised by Japan's continuing agony can be broken down into a number of categories, and especially we need to think both of global and local impacts, as well as the short term, mid term and long term implications of these.

Short-term Pain, Mid-term Gain?

The short term local consequences are evidently likely to be quite severe. Given that large parts of the country have been (and continue to be) without electricity, that factories have been flooded and part of productive capacity permanently destroyed etc, etc, GDP is bound to plummet quite substantially as output drops and takes time to recover.

At the global level the short term consequences are hard to evaluate. That there will be dislocation to extended supply chains is obvious, the Japanese may well buy less luxury goods, while on the other hand becoming more dependent on imported energy, a development which could well affect oil prices. In terms of global demand, it is important to remember that Japan is a significant net exporter, so in theory one country exporting less should simply leave room for others to step in and fill the gap. But things aren't as simple as that, and global trade inter-linkages mean that local shocks can easily be amplified in a way that conventional economic models find hard to capture. The shock that radiated out from the US during the great depression is a classic example from history. Impacts were much greater than a cursory inspection of direct trade effects would have suggested.

But more than anything the issue which is being raised by Japan is one of confidence, and one of how we think about risk (an issue which has been lurking in the background without being resolved since the start of the financial crisis). Problems in evaluating risk and shocks to confidence levels are hardly good for risk sentiment, and it is an increasein this sentiment which is, at the end of the day, giving momentum to the current expansion in global economic activity. And of course risk-negative phenomena are not only to be found in Japan, a fact of which this weekend's opening of military engagements in Libya is just one more painful reminder.

Low Frequency Events Becoming More Frequent?

The whole of the last week has been characterised by a high level of uncertainty, with oil prices remaining extremely volatile and sharp movements in the value of the yen having such a negative influence on currency markets that the G7 felt itself forced to step in. So while the external economic damage seems at the present to have been contained, with one “bad luck” event after another taking place the momentum behind the current recovery is surely coming under a lot of pressure, and all prudent analysts will doubtless be busy revising downwards their growth forecasts for the second half of the year across the board.

There are two reasons which make me think that such a move is completely warranted. In the first place we have a global system which is completely "tensed" at this point. Many problems generated by the financial crisis have been simply kicked down the road a bit, in a bid to buy the time to find the solutions. What this means is that the whole global edifice is extremely sensitive to the impact of unusual events and sudden shocks. Which means that there is a tendency to find that just when you thought things were getting better you start to discover they are actually getting worse.

Japan has provided us with one very good example of this. Towards the end of last year the Japanese economy had been going through what is euphemistically called a "soft patch" - the economy actually contracted in the last three months of the year - but in January and February there did seem to be signs that things were getting better, and one guage of small-business sentiment (the Economy Watchers Index) had even started to surge.
The Economy Watchers' Survey index for current conditions in Japan rose to a seven-month high of 48.4 in February from 44.3 in January, posting the first rise in two months thanks to a recovery in weather and labor conditions, the Cabinet Office said on Tuesday. But the outlook index was unchanged in February, ending a third straight month of an improvement, leading the government to maintain its assessment of public sentiment. The government repeated that the latest survey showed that "the economy has shown signs of picking up."

This much more optimistic reading, suggesting better weather was lifting confidence, was, ironically, written on Tuesday 9 March, just three days before the deadly earthquake struck. It is a stark, if somewhat tragic, illustration of just how uncertain the world we live in actually is, and of just how difficult it is to forsee certain kinds of phenomena. On another front, who at the start of 2011 would have imagined we would at this very moment be facing a UN backed military invasion into Libyan territory.

Longer Run Impacts

Serious as the short term impacts may well be, in the longer run the shadow which will be cast by what is currently happening in Japan could well be very long indeed, in a way which few today can even contemplate (although see this for a good first pass). The justification for this assertion is not only our increased awareness of our collective vulnerability to the impact of natural disasters, there is also Japan’s pioneer status in one very new and very global phenomenon - population ageing - to think about. As we will see below, the optimistic (I would say denial) prognosis is that Japan will soon valiantly overcome this latest bout of adversity in a similar way to which they overcame the post WWII devastation. The Japanese will surely be valiant in their efforts (one only has to think of the spirit of sacrificeof those poor workers who have been asked to handle directly the reactor problem), but their ability to overcome adversity will not be comparable to that registered in an earlier epoch when they had the wind behind them rather than gusting straight into their faces.

It is for this reason that I recently likened the earthquake and tsunami to another mindset-shaping natural disaster: the Great Lisbon Earthquake of 1755. Both events, for their magnitude, and for the seeming arbitrariness with which they strike any given set of individuals, inevitably leave (and left) searing scars in our psyche, the latter being characterised for the way it opened up the path to what many have termed the modern era, while the latter potentially could draw it to a close.

What I have in mind is this, the Lisbon earthquake lead to a questioning of the "natural order of things" in a way which facilitated a more rational approach to the problems in hand. But the application of this rational approach gave rise to a "second degree" natural order of things, in which (thanks to good governance, an economic hidden hand, and technical expertise) the permanence and stability of the social and economic world around us was almost totally taken for granted.

One good example of this would be the idea of the birth of a "Modern Growth Era", whereby it was assumed that economies would simply grow and grow in perpetuity, driven possibly by the dynamising capacity of ongoing technical change. The curious thing about this kind of interpretation is that Robert Solow, founder of the modern neo-classical growth model, intentionally and explicitly left technology out of his model. From a general equilibrium perspective technology does not necessarily generate economy growth.

And now we are faced with a significant number of advanced economies which may well find themselves, far from growing, actually starting to shrink at some point during the next 50 years. The reason for this, of course, is that working-age populations will be declining and ageing at the same time as the elderly dependent population (and their health and pension needs) will be rising and rising. So it seems we are now about to become aware that the Modern Growth Era was simply that, one particular era in our history as a species and as a group of social and political animals. This era is now, in some countries, starting to draw to a close, and a new one will surely open up. My conjecture is that what is happening now in Japan may well mark a tipping point in our awareness of this process in just the same way as the surge in Sovereign Debt in some countries which occured during the financial crisis marked a turning point in how we think about demography and economics, and in how we see the sustainability of health and pension systems.

Of course, as with all issues, there are still those who remain in denial.

But there is another dimesnion to the Japan crisis and how we see it that ties in with the Lisbon earthquake parallel, and that is our need to change mindset. Basically the issue concerns complexity, and how useful old-mindset linear models are in helping us address the kinds of issue which arise in managing highly interconnected and interlocked economic, social and technological systems.

The Spent Fuel Rods Storage Problem

Evidently examples of inter-connectedness, and the issues this gives rise to, are legion. I have already mentioned trade linkages, and from this point of view it will be highly instructive to watch just how the shock-waves radiate-out (or don't) from their Japanese epicentre in the weeks and months ahead. The global financial crisis was also chock-full of similar examples: Lehman Brothers folded and the rate of infant mortality in Northern India shot up, to name just one. But the unfolding events in Japan give us an almost "locus classicus" version of the problem: what to do with the used fuel rods. Now using a simple and straightforward risk management model, it might even seem to be efficient to store the spent rods in the same enclosures as you put the reactor. They are, after all, easier and cheaper to keep and eye on there, and anyway, this procedure helps overcome the sensitivity of members of the general population to being un the proximity of any form of nuclear waste. But looked at from another point of view, grouping risky elements in close proximity in this way only piles risk on risk in a geometric and not a linear fashion, exposing the entire social and economic system to the impact of a positive feedback melt-down process in almost the most literal sense.

I personally cannot help feeling that something similar is going on in relation to positive-feedback-process risk in connection with the individual units which constitute the Spanish financial system. As long as things don't go wrong, well, they don't go wrong, but if and when they do...............

So while the initial impact will surely constitute what most traditional economists like to call a “shock”, both to the real economy and to the equity and currency markets, this shock is unlikely to knock either the global or the local economy completely off their orbits in the short run. We are not talking (barring that worst case scenario that we all have our fingers tightly crossed won’t happen) about another Lehman type event. We are talking about a major natural disaster in a country with proven response ability. Even if Japan is currently now back in recession, rebuilding will almost certainly mean the local economy bounces back quickly again in the second half of the year. The longer run effects, however, will almost certainly be much more important. On one front the impact may well be to cast a much larger and more intense spotlight on the Japanese economy itself, with increasing questions being asked about the sustainability of its current path giving the declining and ageing population issues which confront it. And on another front, the events of the last week may well end up changing our way of thinking about the world we live in, and how we manage risk and insecurity. One week ago few would have imagined it was possible for a developed country to find itself spinning-off out of control, now the previously "unthinkable" is certainly a lot more thinkable.

At The End Of The Day Isn’t There Something "Funny" About Japan?

Japan’s economy is totally export-dependent, riddled with deflation, has central bank interest rates pegged almost permanently close to zero, while government debt seems to be on a virtually unstoppable upward path. Just to give some idea, IMF Japan projections are for GDP growth of around 1.75% a year between now and 2015. During the same period the government debt to GDP level will rise from 225.8% in 2010, to 234% in 2011 and then onwards and upwards to 249.2% in 2015 - that is the debt is rising at over 5% of GDP a year, while GDP is growing at under 2%. Personally I'm surprised that more people don't think there is something funny about these numbers, especially in the context of ongoing deflation and massive liquidity provision from the central bank.

According to one widely held theory, none of the above matters too much since Japan’s government debt is financed from domestic saving. On this view having near permanent deflation seems to be a massive positive, since it enables money to be printed and debt to be accumulated on a never-ending basis. The perpetual motion machine has finally been invented, and is alive and well and living in Japan. Certainly the situation has all the appearance of permanence, since it would now seem to be virtually impossible for the Bank of Japan to move into reverse gear and raise benchmark rates to what was in earlier days a "normal" level of 5% since how would the government continue to finance itself, whether the savings are domestic or external? And of course, if at some point Japan did come to depend on external funding, and interest rates were forced up to 5% or more...........

It continues to surprise me that more people do not find the whole situation odd: gross government debt to GDP only goes up and up, across all horizons, and this is supposed to be normal and sustainable?

On another version of events, the gross debt argument (gross debt is used simply to be able to make a comparison with other countries, such as members of the EU, where it is gross debt that is measured and quoted) is misleading, since Japan's government also has assets (like land which was acquired during the bank restructuring of the 1990s), and it is the net debt level we should be looking at. I have two responses to this objection. In the first place, the argument fails to take into account the implicit liabilities of the Japanese pension and social security systems. Once this is done you have a number which while still being lower than the gross debt figure is consideably above the hypothetical level of net savings. In the second place, while the values of the Japan government's gross liabilities to its creditors are known and quantifiable, it is much harder to put mark-to-market numbers on the assets being held.

But in any event it is the debt dynamic which is worrying. This is not a cyclical phenomenon, but long term structural, and it is hard to see how this dynamic can be broken at this stage. Looking at the two lines in the above chart, they are moving up almost in tandem. Net debt will hit 130% of GDP this year according to the IMF, and could well be around 155% by 2015, and that was before the earthquake. So I don't really get the point people are trying to make with this argument.

Another issue which leaves me a bit cold is the size-of-corporate-savings one, since what people are saying is unsustainable is government debt. It is simpleton-type thinking to suggest that corporate savings could simply be handed over to the government, since this involves the private sector bailing out the public sector in a way which parallels the way the public sector is often bailing out the private sector in Europe. If things were that simple, don't the people who emphasise this detail imagine someone would have thought of it and done it already?These savings are in private hands, and any attempt simply to appropriate private savings would meet with substantial resistance, not to mention the dangers of capital flight, or larger corporates simply moving offshore.

A Population Which Has Been Allowed To Get Too Old Too Fast?

Evidently what we have here is a clear example of something which only goes on until the day it doesn’t. The underlying problem in Japan is not lack of technical ingenuity, nor is it a shortage of credit; Japan’s fundamental problem is a demographic one. The country has a rapidly ageing population, which after many years of ultra-low fertility and rising life expectancy is now the oldest in the planet, with a median age of 45 and rising. This is the backdrop to all these weird and wonderful economic phenomena we are observing, and is the root cause of the weak domestic demand, and of the ultra-sensitivity of the economy to movements in the external trade balance.

So the big question people need to be asking themselves is just what happens when Japan can no longer deliver the external surplus it needs to sustain economic growth? Trend growth has been falling consistently, and overdecades, in a way which is unlikely to change and logically it will at some stage turn negative.

In particular this is long term contractionary pressure is evident since Japan's workforce is shrinking and ageing. The process is, unfortunately, only compounded by the current "irradiation" problem since it will lower the ability of the country to attract immigrants (at least over the next few years), even were Japan's leaders to give this a priority, which is itself unlikely to happen.

As luck would have it Japan did record its first trade deficit in two years in January, and while this is currently only a passing and transient phenomenon, it does constitute some kind of warning shot for what could one day happen. In fact, the Japanese economy returned to negative growth in the last quarter of 2010, and has been struggling to find the level of exports it needs to sustain growth (even despite the strong emerging market demand) as it has been weighed down since the onset of the crisis by the continuing high value of the yen. Since it is now entirely possible that growth this quarter will also be negative, Japan is now almost certainly technically back in recession.

Japan’s Prime Minister Naoto Kan has already stated that Japan is now facing its worst crisis since the end of World War II, and I think it is hard to disagree with this assessment, both in the context of the current “facts on the ground” and given the major challenge the country faces on the demographic front. This is what the consensus view which holds Japan is likely to suffer a temporary economic hit and then enjoy a boost from reconstruction seems to be missing. Japan is very unlikely to have a “New Deal" like economic recovery, for the simple reason that it cannot really afford to have one due to the pressing need to get the debt dynamics better under control.

Indeed already there is talk of raising taxes to help pay for reconstruction work, since clearly a supplementary budget which incorporates more deficit is the last thing JGB market watchers want to hear about at this moment in time. So even if some increase in government debt now looks inevitable this year, the pressure to claw it back in a near term future will be significant.

Not least of the reasons for such caution will be the growing vigilance the country’s debt is attracting from the rating agencies. Standard & Poor’s cut their Japan rating in January, and while Moody’s have been quick to point out that the current crisis will not affect their analysis, they did change their Japan rating outlook to negative from stable at the end of February on concern that the country’s political gridlock will limit efforts to tackle the debt burden. These concerns will only be heightened in the aftermath of recent events.

According to Marcus Noland, deputy director of the Peterson Institute for International Economics in Washington what Japan is facing “is a Keynesian stimulus program that nobody can argue with”. Unfortunately, this is far from being the case, Japan is at the end and not the start of its "modern growth era" and any attempt to finance a massive reconstruction programme by issuing yet more debt is likely to provoke just what Noland discounts: a lot of argument. Funny how so many people still fail to find anything “funny” about what has been happening in Japan.

Wednesday, March 02, 2011

Japan has outsourced engineering along with manufacturing

According to this source, Yoshio Watanabe, a professor of electrical engineering at Kanagawa University states that many Japanese companies have outsourced research, development, and engineering overseas in the last twenty years.

The same source states that science, math, and engineering are unpopular fields of study for Japanese students.

One theory regarding the decline in interest in science in advanced countries states:

“Highly developed countries in science and technology tend to face the problem that science literacy declines. This is because, in highly developed countries, outcomes of science and technology
becomes a “Black-box” and difficult to understand the mechanism behind the phenomenon”.

In an interview in 1998, Professor Ryoichi Ito, the President of The Japan Society of Applied Physics described his view of the “black box” problem:

“I think the reason is quite simple; we are surrounded by “black-box” technology. For example, when you open up a traditional watch you can see the cogs moving around; but nothing moves in modern watches. The fact that a television produces a moving image is taken for granted. In the days of the vacuum tube, if you opened up a radio you could see glowing valves and could see something “working”. These days, equipment is all solid state and it is not possible even to begin to imagine how it might function. The only things that you can still see working are bicycles. It’s becoming almost impossible to carry out basic repair to a car by yourself.

Q: Have you noticed any differences in the students who are entering your university nowadays?

Professor Ito: Yes, there have been many changes in the type of students we teach. One characteristic is that most of them have never carried out any experiments. They’ve never soldered joints or used tools to build equipment-or even repaired a bicycle. It’s very difficult to teach them how to carry out experiments. They have never experienced that “small electric shock” that many people used to receive. when playing with electrical equipment. They don’t have a feeling for what electricity is and how to use it in practice.”

This theory is doubtless partially correct.

A more likely cause of decline of interest in science is that scientific research organizations become large and bureacratic; slow to absorb new ideas and methods. Application of scientific advancements become the domain of multinational corporations and government, which suppress innovations that are not produced within their organizational systems. Students in their later teens can observe this and choose other, more rewarding career paths.

The NY Times reported in July 2010 that “large Japanese companies are increasingly outsourcing and sending white-collar operations to China and Southeast Asia, where doing business costs less than in Japan.” However, the Times reports,

“Japanese outsourcers are hiring Japanese workers to do the jobs overseas — and paying them considerably less than if they were working in Japan. Japanese outsourcers like Transcosmos and Masterpiece have set up call centers, data-entry offices and technical support operations staffed by Japanese workers in cities like Bangkok, Beijing, Hong Kong and Taipei.”
Japan is shipping both jobs and people overseas. Per a 2004 JETRO report:

Expanding Japanese Presence In East Asia Reflects Shift To Offshore Production
• At present, 60% of newly established overseas operations of Japanese manufacturers are in China and other parts of East Asia. Unlike Japanese affiliates in Europe and North America, however, these companies tend to sell output to their parent companies in Japan, rather than in the local market.
• The trend reflects efforts by the parent companies to shift production offshore, particularly assembly and finishing operations to the ASEAN4 nations and China.

It will likely turn out to have been a policy mistake for Japanese companies to have shifted production overseas.

Tuesday, January 11, 2011

What happens if Japan runs a trade deficit

Edward posted this in a comment to the previous post:

"Those who argue that Japan can simply keep eating its own debt indefinitely are right until and unless the economy can no longer run an external trade surplus.

Theoretically, as population ages, this point will be reached, since productivity will fall with rising workforce median age. So we know there is an outer limit somewhere, although we have no idea at this point where that limit is.

Once Japan has a trade deficit it will all be over pretty quickly, since then of course they will have to attract funds to finance the deficit, and this is where things will start to get pretty tricky."

Japanese workers take pay cuts to stay employed

On December 27, Bloomberg reported that "Japanese workers´ willingness to accept wage cuts to safeguard their jobs is lowering prices and deepening deflation". This assertion was attributed to Hisashi Yamada, chief senior economist at the Japan Research Institute in Tokyo. Yamada also asserted that
"Japan´s jobless rate would be around 10 percent, compared with the current 5.1 percent, if companies had fired workers rather than cut pay since Japan fell into a recession in 2008. "
The monthly average wage in Japan has fallen to 315,294 yen, the lowest level since the government started tracking the data in 1990. Assuming an exchange rate of 90 yen to the dollar, that is roughly $3,500 per month, or $42,000 per year.

Presumably Japan's employers are reducing labor cost to offset the effects of a stronger yen versus the dollar and price competition from Chinese goods on profitability.

One effect that the falling wage levels will have is to reduce the ability of Japanese households to put savings into government debt. This will add some volatility to the prices for Japan's government debt.

Falling wage levels also will make it more difficult for Japan to reduce its dependence on exports as the primary source of GDP growth.