This morning’s news from the land of the rising sun is certainly a case of something which can be looked at both from a glass half-full and also from a glass half-empty perspective. Let us open with the glass half-full argument. This opens with a statement that according to her preliminary estimate of Gross Domestic Product, the Japanese economy has now had a third quarter in a row of economic growth. The second quarter of 2012 saw growth of 0.6% compared to the previous quarter or an annualised rate of 2.6%. So on a superficial level Japan seems to be making progress towards the objectives of the economic strategy named after her Prime Minister called Abenomics. Although not at the equivalent level to the 40 centigrade heatwave currently sweeping Japan.
The first worry is that the numbers above show economic growth in Japan slowing since the first quarter of the year’s 0.9%. Indeed adding to the sense of disappointment is the fact that economic growth in the first quarter was revised done from 1%. If we review the situation overall then the application of more of the arrows of Abenomics has coincided with an economic growth slowdown rather than the promised acceleration.
Tucked away in the numbers was something else which was disappointing for the Japanese government. It hoped that Japanese businesses would invest strongly in response to the monetary and exchange rate boost but in fact investment fell by 0.1% this quarter and this continued a declining trend lasting for eighteen months now.
Be careful what you wish for
One of the objectives or arrows of Abenomics is to end the disinflation or falling prices which have been a feature of her lost decades. Looked at like that the numbers from the Bank of Japan below will be perceived as a success.
The Domestic Corporate Goods Price Index rose 0.5 percent from the previous month
These meant that this particular index is now rising at an annual rate of 2.2% which is pretty much the same rate that it was falling at this time last year. So far so good.
However Japanese consumers and businesses may not be anything like as happy as her official bodies are about these development as the import price index has risen by 18.5% over the past year in Yen terms. This is feeding into increased costs for them because of the overall rise in this index in July some two-thirds was in the “Electric power, gas & water” category which central bankers like to ignore but ordinary individuals find to be both vital and essential.
Back to GDP Growth
Unfortunately for Shinzo Abe he did get some inflation in the latest GDP report as the measuring stick for this called the implied deflator rose by 0.1% on a quarterly basis and reduced its annual rate of fall to 0.3%. Just to give you an idea of how longstanding the falls in this area are, the annual series in the latest report go back to 2001 and every single reading is in negative territory. The underlying index which was rebased in 2005 at 100 is now at 91.2 and I am trying to think of anywhere else like this and cannot. Can anybody else?
So at this point Abenomics has a success, but by the time we reach economic growth it has a defeat! The twist is that statisticians count the output and then subtract the inflation to get a measure of real growth. But in Japan this means subtracting a negative number so that it has added to real growth. So a reduction in the rate of price falls leads to recorded economic growth falling and by getting what it wants in the area of disinflation Abenomics moves away from what it wants in another, economic growth.
One way of explaining the drop in economic growth in this quarter is to simply look at the deflator change.
Revised numbers for June were issued this morning and they were not a subject raising much if any cheer. Monthly production fell by 3.1% compared to May and this left it some 4.6% lower than in June 2012. Added to this, orders for Japanese machine tools fell by some 12.1% in July which does not provide much optimism looking forwards.
What about the debt?
The other side of the debate is Japan’s large public-sector debt and deficits. In many ways the economic question facing Japan is, can it generate enough economic growth to finance this debt. According to the Japanese Ministry of Finance, a threshold has now been passed in this area. Here is how Japan News reported this.
the nation’s debts as of the end of June were about 1.01 quadrillion yen. It is the first time the combined total of three types of debt went beyond 1 quadrillion yen. The debt per capita was about 7.92 million yen.
So the debt continues to mount for Japan’s public-sector and the individual or per capita debt relates to just over £53,000 each. This does have consequences for example of planned Japanese public expenditure in 2013 some 10.7% goes on debt interest. Also the amount of new bond issuance required is the same as her total tax revenues.
The deficit situation is that planned expenditure is 1.96 times planned total revenue.
The gross national debt to GDP ratio is expected to be 224.3% in 2013 which provides food for thought. Japan’s statisticians also provide some food for thought for the UK as they calculate its ratio at 110.8% (just below the US (113%) but just above that of France (108%)).
As we advance to yet another largest number recorded on this blog, let me try to help with an image provided by Japan News.
If 1 quadrillion yen’s worth of 10,000 yen bank notes were stacked on top of each other, the pile would be about 10,000 kilometers high, the distance from Tokyo to London
Saving in Japan
In case you were wondering how this pack of cards has not collapsed long ago, it is because the private sector in Japan has substantial savings and investments both at home and around the world. It is often forgotten in the rush to point out the low rates of interest on savings in Japan that the falling price level has meant that in real terms they have made a return. By contrast my home country the UK has had persistent negative real rates of return in the credit crunch era.
Back on July 26th I wrote a post pointing out that Japan had “the wrong type of inflation”. Today’s GDP report shows that right now any inflation looks like the wrong type. Certainly for the Japanese saver who will see returns fall in real terms. Also the Japanese worker must be worried about whether they will see wages rise enough to compensate for inflation which is appearing first in essential areas such as utility bills. If they do we would certainly be seeing quite a reversal on recent history there.
However I will end the economics today by looking at a number which summarises the Japanese position in many ways. When the bubble burst in 1990 tax revenues were 58 trillion Yen and now they are expected to be 43.1 billion Yen this year. No wonder deficits and the national debt have surged! Is that a future awaiting the rest of us?
Meanwhile last week Japan launched its largest warship since world war two. Officially a helicopter destroyer it looks (as pointed out in the comments section a while ago) rather like an aircraft carrier. A nationalistic Japanese government building aircraft carriers. What could go wrong?