The Latest Data from Japan

It appears that there is still some green shoots left in the news from Japan even though the underlying picture is one of deteriorating fundamentals. We learned recently how Q1 was absolutely horrid in Japan with out declining at an annualized 15.2% which, I a dread to say, are numbers normally reserved to the likes of the Baltics, Ukraine and Bulgaria. The second quarter will no doubt offer some improvement and the second derivative is likely to be all over the Q2 data in general. However, the real question is what kind of recovery or stabilization we will observe and as Edward pointed out recently those two things are not the same and what we most likely to see is the latter and not the former.

In Japan the green shoots crowd soldier on with the news that industrial production showed second consecutive month of expansion in April. Output consequently rose a healthy 5.2% from March and factories are estimated to continue the increase in production throughout May and June.

Japan’s industrial output surged the most in 56 years in April as a rebound in exports helps the economy emerge from its worst recession since World War II. Production rose 5.2 percent from March, the second monthly gain, the Trade Ministry said today in Tokyo. The increase was faster than the 3.3 percent economists estimated, and companies said they planned to boost output in May and June as well.

The yen gained on speculation funds will flow into Japan as the economy resumes growing after last quarter’s record contraction. Still, output is running at two-thirds last year’s levels, saddling manufacturers such as Nikon Corp. with workers they no longer need and driving the jobless rate to a five-year high of 5 percent.

I am skeptical as to the underlying dynamism here in the sense that Japanese companies are still cutting inventories both on a monthly and annual basis which suggest that companies are not expecting a vigorous uptick in future demand. Moreover, the annual print of industrial production restored the depression discourse by clocking in at a healthy 31.2 % contraction.

In the context of inflation the news confirmed that Japan is having none of the green shoots from its domestic market. Consequently, prices continued their deflationary trend with the general index as well as the index stripped from fresh food declining -0.1% from a year earlier. The core-of-core price index on the other hand which strips out headline inflation slumped to an annual -0.4% drop which suggests, yet again, the extent to which Japan lacks the domestic "gusto" to produce anything resembling a recovery. In this vein, household consumption expenditures declined by 1.3% over the year in April and analysts, in general, are none too positive about the prospect of domestic demand in Japan picking up anytime soon, (from Bloomberg);

“The Japanese economy is entrenched in deflation, if we define it as continuous price declines,” said Hiroaki Muto , a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Given the economy’s weakness, it’s hard to anticipate consumer prices will reverse course and allow the central bank to exit from its very accommodative monetary policy.” Consumers may delay purchases if they expect goods to get cheaper, eroding corporate profits and forcing firms to cut wages. Japan only emerged from a decade of deflation when prices started to rise in 2005.

Core prices in Tokyo, the nation’s capital, fell 0.7 percent in May from a year earlier, the biggest drop in six years, according to the report. It was the first decline since September 2007.

To add injury to insult, Japan's jobless rate increased by o.2% from March and thus reached the 5% mark. The outlook especially in the manufacturing sector looks bleak with all major industrials such as e.g. Toyota, Nikon, Canon etc looking at very harsh times and production cuts to scale down to the slump in demand for their products. Bloomberg reports that the number of people receiving unemployment insurance increased a massive 59.1% which means that 793.000 people are now receiving such funds.

In the midst of such news one can only feel sympathetic, yet skeptic, that government handouts of 12000 yen to households (Ricardian Equivalence anyone?) and cutting high way tolls will have anything but a domestic impact on the incoming data from the domestic demand side of the economy.

Ok, so this was a small update on the state of affairs in Japan. A little bit of green shoots, but mostly a picture of steadily deteriorating fundamentals and more importantly a picture which confirms that any kind of stabilization in Japan will be markedly deflationary if it is not accompanied by vigorous external demand. Gee, I wonder why that may the case ...


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