27th July 2012
Today I wish to take a look at the land of the rising sun otherwise known as Japan. And in particular I intend to examine what has happened since the tsunami of March 2011 hit her following the Great East Japan Earthquake and the subsequent problems with the Fukushima nuclear power plant. If we step back in time to then I wrote this back on March 15th 2011:
"The news media has had various forecasts over the last 48 hours of the scale of the crisis and many of these also try to tell us the scale of this catastrophe and come with a promise of a recovery which is fast. I will leave you with one thought, exactly how do they know that?"
What does the Bank of Japan think?
Board member Ichida has given a speech which gives us some insight as to the thoughts of the Bank of Japan. Here are its thoughts on likely economic growth:
"Japan's real GDP growth rate is projected to be 2.3 percent for fiscal 2012 and 1.7 percent for fiscal 2013."
Not really the surge promised above is it? And I have argued before that GDP (Gross Domestic Product) overvalues recoveries from such events as it covers new building and construction but has no allowance for the destruction. And Japan has been constructing and rebuilding as Mr Ichida discusses below:
"domestic demand remains firm, supported mainly by reconstruction-related demand after the earthquake. Public investment has been increasing with the progress in the implementation of government budgets earmarked for reconstruction related to the disaster".
If you are thinking that the recovery seems somewhat disappointing after all this effort then so am I. And the Bank of Japan is also doing what it considers to be its best to with its "Growth-Supporting Funding Facility" and it is having yet another go at Quantitative Easing with its programme re-starting in October 2010:
"The outstanding amount of the Program stands at approximately 51 trillion yen as of June 10, and thus the Bank will increase it by approximately 14 trillion yen – at a pace exceeding 2 trillion yen per month on average – by the end of this year. The amount of the Bank's purchases of assets, including those of Japanese government bonds (JGBs) conducted regularly at the pace of 1.8 trillion yen per month, will total as much as 4 trillion yen per month on average."
So to use my musical themes the Bank of Japan continues to "Pump up the volume" as it gives us "More,more,more". As it has now had several goes at QE I find it interesting that it now implicitly agrees with my view that QE does not work. If this is "powerful monetary easing" as they claim then how has this happened?
two lost decades
What are the features of Japan's problems?
Lack of domestic demand
Japan has suffered from persistently weak domestic demand over the lost decades but there has been some support here from the reconstruction effort as discussed above. However today has seen figures for retail sales and these showed something of a slowdown. In June the year on year growth rate in retail sales dropped to 0.2% from May's 3.6%. And ever worse wholesale sales fell from an annual growth rate of 2.1% to minus 3.8%. An old problem re-emerging? Quite possibly if you take out the obvious year on year boost from the tsunami.
Disinflation has been persistent
This is a feature which really distinguishes Japan. She has had several periods of negative inflation and falling prices. This peaked in August 2009 when the Bank of Japan's favourite inflation measure of consumer prices less fresh food fell to minus 2.4%. It is now aiming for positive inflation of 1%. Unfortunately for it today's news is not good:
"The consumer price index for Japan in June 2012 was 99.6(2010=100), down 0.5% from the previous month, and down 0.2% over the year."
It is unfamiliar to see the actual index below 100 is it not? And we also got some more recent numbers for Tokyo:
"The consumer price index for Ku-area of Tokyo in July 2012(preliminary) was 98.7(2010=100), down 0.2% from the previous month, and down 0.8% over the year."
A Strong Yen
This remains an issue in Japan and it is important to take stock here. If we look at the Yen we see that as I type this there are 78.14 Yen to the US Dollar and 95.75 to the Euro. I have not seen this mentioned elsewhere but to me the Bank of Japan was probably as grateful as anyone for the Euro rally caused by Mario Draghi's (head of the European Central Bank) remarks yesterday. But if we go back to the tsunami we recall that the world central banks piled in to drive the Yen lower after the tsunami rather perversely had helped drive a further surge in it. Their initial impact was to drive the Yen to around 81 against the US Dollar and 115.3 versus the Euro.
As you can see the intervention has had no long-term impact and against the US Dollar the Yen is back at what were considered crisis levels only 16 months ago. The situation against the Euro is even worse as its fall has meant an extra Yen surge against it. No wonder Japanese exporters are finding the going difficult and that we have seen Japanese trade deficits something that not so long ago would have been considered virtually unthinkable.
The Japanese stock market
We have not seen much of a recovery here since the tsunami. In fact Japan has retreated to levels seen in the post-tsunami panic. The last couple of days have brought rallies but the Nikkei 225 equity index closed this morning at 8566. This compares to a post-tsunami closing low of 8605 according to Bloomberg. Not much sign of a recovery there. And if you compare it to other stock markets.
What might the future bring?
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