In the immediate aftermath of the earthquake and tsunami that hit Japan recently I wrote this about the likely behaviour of her government about the nuclear crisis that was beginning to unfold at Fukushima.
We of course do not yet know how badly this particular facet of the crisis will play out but in culture where the word for yes hei (hai) can mean both yes and yes maybe and the underlying importance of loss of face means that the Japanese authorities are very unlikely to be telling us the truth about the real situation.
This morning the severity rating of the crisis has risen to seven (the maximum) from five. This means that it is now considered the same level of problem as the 1986 Chernobyl disaster. If you think about it raising the severity level from five to seven a month later has proved my point. Exactly how can the situation be worse after all this time? It is quite plain that the crisis has been more severe all along and whilst there have been some improvements on what happened at Chernobyl as an evacuation zone was established more quickly I wonder about the long-term effect will be on those who were only evacuated yesterday.
For those who wonder what level seven is then it is called a major accident and is defined thus.
Major release of radioactive material with widespread health and environmental effects requiring implementation of planned and extended countermeasures
Comment
The Japanese government is now telling everybody that this problem is nothing like Chernobyl after just raising the threat level to the same number! I am afraid that their behaviour has been shameful and they have now a problem of credibility as frankly who believes them now?
The Economic impact
A short-term impact was the fall in the Nikkei 225 equity index this morning of 164 points to 9555 as markets responded to the news about Fukushima. Also the Yen exchange rate rallied too echoing its behaviour when the natural disaster originally struck on March 11th. It now stands at 83.94 versus the US dollar rather than the 84.60 it was before the nuclear threat level was raised.
Longer-term impacts
One issue that is hard to measure apart from news about temporary closure of car plants and production lines is the effect of the natural disaster on the production chain as the “just in time” production system has virtually no slack in it. This issue could affect Japan for some time. For example power cuts are still affecting industry and causing short-time working. Another issue is that nuclear power is likely to decline in influence not only in Japan but around the world. We have already seen a change in Germany’s plans for nuclear power and others are likely to follow this trend. This of course puts pressure on other alternatives such as renewables coal and oil just at the time when there are plenty of issues with the oil price and supply of it. So just as hopes for a peace deal and apparent closing of positions by clients of Goldman Sachs had driven the oil price lower as yesterday developed we now see buyers back as Brent crude dipped below US $122 per barrel before rallying to US $123.33 as I type this.
Accordingly the future is even more uncertain than ever as there is a danger of Japan being pushed back into recession. Her economic output or GDP had fallen by 1.1% on an annualised basis in the fourth quarter of 2010 and to enter a recession you need two quarters of negative growth. Plainly that is much more likely after the natural disaster which has hit her and I fear for the second quarter as well.
Should problems build and continue we hit another issue. Japan plans to spend to aid the reconstruction effort and this will lead to a further increase in Japan’s fiscal deficit and national debt. As the International Monetary Fund was already estimating that Japan’s national debt would reach 250% of her GDP in 2014 we can see that a bad situation will get worse. Remember all sorts of doom was predicted for Greece when her crisis began should she hit a ratio of 150% on the same measure! Japan has so far escaped such problems because 95% of her national debt is domestically financed but the number keeps growing and her population keeps aging.
The International Monetary Fund has entered the fray by lowering her estimate for economic growth in Japan this year from 1.6% to 1.4%. As this is less than the error term on their estimate I wonder what they really think they are telling us!
The International Monetary Fund agrees with me about the rate of interest charged to the Euro zone as part of the “rescue”
I have argued for some time now that the various “rescue” mechanisms of the Euro zone have charged too high an interest-rate to the peripheral nations. Rather than helping with insolvency issues they have in effect guaranteed it and led to a worsening rather than an improving situation. In suitably coded language the IMF is now willing to put in print that it agrees with me.
and a decision on adjusting the interest rate charged on EFSF loans is urgently needed to help support fiscal sustainability.
By EFSF it means the European Fiscal Sustainability Facility which is its main “rescue” vehicle until mid-2013. It has planned to charge various interest-rates and going forwards plans to charge a different rate to Greece than it does to Ireland I think that speaks for itself.
UK Consumer Price Inflation dips to 4% on an annual basis
Earlier this morning we received this update from the Office for National Statistics.
CPI annual inflation – the Government’s target measure – was 4.0 per cent in March, down from 4.4 per cent in February……In the year to March, RPI annual inflation was 5.3 per cent, down from 5.5 per cent in February.
So an improvement which again left the economics forecasting industry on the back foot! They were expecting an unchanged figure.
What were the main influences causing this?
The major influence came from food and non-alcoholic beverages where in comparison with a year ago the strongest influences were apparently fruit, bread and cereals. Also there was a downward influence from recreation and culture and air transport. There were still upward influences- inflation is still 4%- and the main one here were increases in domestic heating and fuel bills and the price of cars in relation to a year ago.
The ONS tells us that the main influences were true for both the Consumer Price Index or CPI as for the Retail Price Index or RPI but this is not quite true as I discuss below.
Comment
Whilst the annual rate of inflation has dipped back from the height of 4.4% of last month to this months 4% it is important to remember that prices are still rising. On a month on month basis the CPI rose by 0.3% from February to March and its underlying index rose from 117.8 to 118.1.
As I look at the detail of the numbers I see this.
Fruit prices, overall, fell by 4.7 per cent, a record for a February to March period. Bread and cereal prices, overall, fell by 2.6 per cent, the largest ever monthly fall.
This reminds me of the recent report of the British Retail Consortium from last week as according to its Director.
The proportion of groceries going through the tills on promotion has reached a new all-time high of 40 per cent………..Over the shorter term, food was actually cheaper in March than February
I can personally vouch for the bread component as recently the price of a loaf has been discounted quite considerably by the supermarket that I visit although some of the promotions are now ending. If we step back for a second it becomes apparent if we combine the BRC report with today’s inflation figures is that discounting by shops and supermarkets has led to a fall in the annual rate of inflation in March. So the real question is how long can they keep this up?
Why did the RPI annual rate of inflation only fall by half the rate of CPI?
If you have inflation measures it is preferable if they tell you the same story. We have had the problem in the UK for quite some time as RPI has for a while indicated a higher inflation rate than CPI. This month the difference has got wider as it was 1.1% last month and is now 1.3% as the annual rate of inflation as measured by RPI has fallen by only half that of CPI.
Ironically house depreciation fell as an influence and as this cannot affect CPI as one of its flaws is that it does not allow for housing costs one initially might expect RPI to fall by more than CPI and not less! However food bread and cereal prices,which are this months strongest influence, have a higher weighting in the construction of CPI as do other downward influences such as air transport.
There is a more technical point also as the rising price of new cars affects RPI more than CPI. This is a consequence of CPI using hedonics and a geometric index which for the uninitiated means that such influences as rising car prices as less likely to influence CPI. Some might call it sleight of hand.
Conclusion
It would appear that this months dip in the annual headline rate of inflation was caused mostly by the discounting of some prices by shops and supermarkets. Adding in the way that the CPI index is calculated meant that the headline rate was affected by 0.4% when its predecessor RPI fell by a much smaller 0.2. If we remember that on a month on month basis prices rose and that shops are unlikely to discount forever then I feel that we may finally learn the true definition of the word temporary!
At a time like this there is always some politician ready to offer a quote and I have heard Vince Cable saying that this is a “victory” for the policy of the Bank of England. If we put to one side for the moment that an annual inflation rate of twice the official target is hardly a victory I guess it does seem much less of an issue when you have an inflation indexed pension like Vince and his fellow politicians.
