Global Demand Freefall Waning... Japanese Export Edition

The AP with the details:

Japan's exports in June fell by the smallest margin in six months, adding to evidence that global demand is recovering as the recession loosens its grip.

Shipments from the world's second-biggest economy fell 35.7 percent from a year earlier, an improvement from a 40.9 percent decline in May, the government said Thursday. Exports have fallen every month since October.

As a result of a bigger fall in imports, Japan posted a trade surplus of 508 billion yen ($5.4 billion) — the highest value since March 2008, according to the Ministry of Finance.

Export declines eased in all of Japan's major markets, particularly China. Huge stimulus spending by Beijing helped Chinese growth accelerate in the second quarter, expanding by 7.9 percent from a year earlier.

Exports to Asia and the U.S. are showing the clearest recovery, said Richard Jerram, chief economist at Macquarie Securities in Tokyo.

I've posted on this in the past, but we can see the growing importance of China to any Japanese recovery. More important, we can see the bounce not only in Chinese exports, but those to the U.S. as well.

The composition of exports to each country is widely varied and the good news is that we are seeing a stabilization of exports to both. The U.S. is a much larger market for transportation equipment (i.e. autos), whereas China is the larger market for machinery (needed for the continued industrial expansion) and manufactured goods.

It will be interesting to follow how this plays out in the coming months. We should be able to see the impact of the cash for clunkers program has on exports to the U.S. and the continuation of China's stimulus plan on exports to China.

Source: Customs.Go.JP

Japanese Exports Halfway There

Bloomberg details:

Japan’s exports rose faster than economists estimated, sustaining a boost to the economic recovery that may diminish as the yen strengthens.

Shipments abroad advanced 27.7 percent in June from a year earlier, the Finance Ministry said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg was for 23.5 percent. From a month earlier, exports fell 1.8 percent.

An increase shows that the global economy continues to recover, but (as always) the increase needs to be put in perspective. Current export levels are still only about halfway back to the level seen prior to the global economic crisis.



The question is what happens going forward? Bloomberg details that following a strong rally in the yen in recent months, officials are concerned:

Japan’s currency climbed to a seven-month high against the dollar this month, prompting officials including Trade Minister Masayuki Naoshima to warn that its appreciation may hurt the recovery. The higher local currency threatens to erode the value of earnings of exporters such as Toyota Motor Corp.

“The yen has appreciated too much,” Koji Miyahara, chairman of shipping company Nippon Yusen K.K., said last week. “I’m hoping the yen will depreciate to a range of 95 to 100 to the dollar as soon as possible.”

Currency can do wonders on a relative basis, but not when every nation intends to follow the same path. And this points to what I view as a huge problem... China, broader Europe, Japan, and the U.S. (to name a few) view exports as the key for future growth and a weaker relative currency as a huge driver of those exports.

But one nations increase in net exports (by simple math) is another nations net import. So... which nation will take all of these exports? I personally don't see many takers.

Source: Customs.GO

China Now Accounts for ~20% of All Japanese Exports

Bloomberg reports:

Japan’s exports fell in June at the slowest pace this year as demand picked up worldwide, helping the trade surplus widen for the first time in 20 months and setting the stage for an economic recovery.

Shipments abroad declined 35.7 percent from a year earlier, after dropping 40.9 percent in May, the Finance Ministry said today in Tokyo. The surplus widened to 508 billion yen ($5.4 billion).

Bloomberg continues:

Faster growth in China is propping up sales for Japanese manufacturers including Komatsu Ltd. and Nissan Motor Co. The recovery in shipments from the record collapse spurred by the financial crisis probably helped the economy grow for the first time in more than a year last quarter.

“There’s no doubt China has been a driving force for Japan’s exports,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “Manufacturers will probably continue to increase production amid the improvement in exports, and that’s good for the economic outlook.”

Indeed. Once one gets over the absurd collapse which makes me question the "setting the stage for an economic recovery", it does become clear that things would be MUCH worse if China had not shown relative strength (and now account for ~20% of all Japanese exports).

Source: Trade Stats of Japan

What if the U.S. is Unable to Power the Global Recovery?

Reuters details:

Japan's exports edged lower for the third consecutive month in September as a rising yen weighs on overseas shipments and as a rebound driven by global stimulus spending and the stocking of inventories starts to wane.

Shipments to China continued to improve, but economists doubt this will continue as the country is trying to prevent its fiscal stimulus from forming asset bubbles in its economy.

Exports to the United States, a vital market for Japanese goods, were also slow to recover, suggesting exports will make less of a contribution to Japan's growth in coming months.

"The yen's rise is hurting corporate revenues. While the global economy is picking up, the boost to exports from strength in China may start to fade," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

"What's needed now is for consumption to recover in the United States, which is the major market for high value-added Japanese goods. In that sense, it may take time for exports to stage a full-fledged expansion."

As can be seen below, the relative strength of China has been a huge driver of the Japanese recover, but Japanese exports to the U.S. are down 34% year over year (which coincidentally matches Japanese exports to the "world ex-China / ex-U.S.", also down 34% year over year).



So when (or maybe more accurately stated will) the U.S. be able to provide the global economy with much needed private demand?

With a stretched out consumer that is busy rebuilding their personal balance sheet (or unemployed, thus busy just making ends meat), I personally doubt it. Even if they wanted and/or were willing to, is the U.S. consumer even able to with a shrinking supply of credit available to them and diminished personal assets to lever even if they do have access to a loan.

Source: Customs.Go.JP

Japanese Exports Expand for First Time Since Crisis

Bloomberg reports:

Japan’s exports rose for the first time since Lehman Brothers Holdings Inc. collapsed 15 months ago, adding to signs that the world’s second-largest economy is recovering from the global recession.

Shipments abroad rose 12.1 percent in December from a year earlier, the Finance Ministry said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg was for a 7.6 percent gain. Exports fell 6.3 percent in November.

There were two keys for this positive year on year increase... an Asian recovery and a comparison from an extremely depressed level.

Asia

“Shipments to Asia, especially China, have been growing a lot and these are strong results,” said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. “It’s safe to say that exports were strong” in the fourth quarter.

Depressed Level

The improvement in exports last month was partly due to a favorable year-on-year comparison. In December 2008, shipments abroad tumbled 35 percent as global trade froze in the aftermath of Lehman Brothers’ collapse in September. From a month earlier, exports rose a seasonally adjusted 2.5 percent in December, today’s report showed.

Source: Customs.Go.JP

Japan: Machinery Orders and a (Potential) Recovery

WSJ details:

Japanese core machinery orders fell 3.7% in January after unusually strong growth in the previous month, the government said Wednesday, suggesting a full-fledged recovery in business investment is still some way off.

The findings suggest it may take more time before Japan's capital investment—which accounts for 15% of gross domestic product and is a pillar of domestic demand—starts recovering steadily and strongly. Core orders are considered a reliable gauge of future capital investment, and exclude often-volatile orders for ships and those from electronic power companies. The machinery orders were down 1.1% in January from the previous year.

Still, January's decline may be too moderate to dispel the view that demand for machinery is stabilizing. Previous data show core orders gained 0.5% on quarter in October-December for the first rise in seven quarters, and there are signs that the improvement in exports—a key incentive for manufacturers to invest—is gaining steam.

The below chart details the past 20 years of Japanese machinery order data in an attempt to avoid the short-term noise (while down in January, machinery orders were up more than 20% in December).



As indicated above, Japan has successfully relied heavily on exports in the past (at the beginning of last decade) to get their economy out of what was a more than a decade long period of slow / no growth. After peaking in mid-2007, the rug was taken out from under them when the continued lack of internal demand was met by a crash in external demand.

The key question is can the Japanese economy do it again? Business Week details news out of China, that on the margin, suggests they might:

China’s trade surplus shrank to the lowest level in a year in February as a surge in imports signaled the nation may start to outshine the U.S. as a destination for the world’s goods.

Imports rose a more-than-estimated 44.7 percent from a year ago, the customs bureau reported on its Web site today. The surplus was $7.61 billion, and exports gained 45.7 percent.

While the bulk of these imports are in the form of commodities, China is increasing their demand for "value-add" goods on the margin. If they (and other emerging Asian countries) continue to do so, Japan may have a shot...

Source: ESRI

Japanese Exports to China > to U.S.

Ugly all around for Japan, but the relative strength of the Chinese economy to that of the U.S. is rather telling / interesting. Bloomberg reports:

Japan’s exports fell 46.5 percent in March from a year earlier, today’s report showed, after declining a record 50.4 percent in February. Imports slid 37.8 percent, compared with an unprecedented 44.9 percent drop the previous month.

Shipments to China sank 31.6 percent in March, after falling 39.7 percent in the previous month, according to a separate trade report released last month. Exports to the U.S. fell 51.4 percent after dropping 58.4 percent in February. Today’s figures don’t include regional breakdowns.

“China’s economy has started rebounding, but the emerging economies on the whole aren’t strong enough to lead the world economy,” RBS’s Nishioka said. “Capital probably won’t flow back into the emerging nations unless the industrialized countries return to growth.”

Source: Customs.Go.JP

Japanese Exports Almost Halved in 12 Months

Bloomberg via Naked Capitalism:

Japan’s exports plunged 45.7 percent in January, resulting in a record trade deficit, as recessions in the U.S. and Europe smothered demand for the country’s cars and electronics...

Gross domestic product shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, and economists predict the slump will drag into this quarter. Toyota Motor Corp., Sony Corp. and Hitachi Ltd. -- all of which forecast losses -- are firing thousands of workers, heightening the risk the recession will deepen.

“The drop in exports is unbelievably bad,” said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo. “The pressure on companies to cut jobs and investment is rising and that will make the recession deep and protracted."

Regime Change in Japan

Bloomberg details the massive victory of the Democratic Party of Japan:

Hatoyama, 62, led the DPJ to win 308 seats yesterday in the 480-seat lower house, public broadcaster NHK said, ousting the party that ruled Japan for all but 10 months since 1955. The DPJ gained control of the upper house two years ago.

And the reason for the change:

Voters have given Hatoyama a mandate to switch priorities from aiding the companies that built Japan’s $4.9 trillion economy to helping families cope in a society where almost a quarter of the population will be over 65 by 2014. To encourage people to have children, the DPJ says it will increase child support and lower education costs, paying for this by slashing outlays on roads, bridges and public works.

“The whole idea of people rather than concrete, and, ‘Let’s be nicer to the Japanese population,’ could be immensely positive in the long term,” said Philip Whittome, who manages Japanese stocks at Investec Asset Management in London. “The election might lead to some changes in how Japan is run in ways that are underappreciated by the foreign investment community.”

While that may indeed have positive economic implications in the long run, I'm not sure how this will transform the Japanese economy in the short-run. An economy that according to this morning's sales report shows that wholesale sales dropped 30% year over year in July (greater than June's 28.7% year over year change).



In other words, Yukio Hatoyama's honeymoon may be short:

Economic reports indicate the expansion that began last quarter may already be in danger: the jobless rate rose to a record 5.7 percent in July, factory output growth slowed and household spending dropped the most in five months. That leaves Japan “more dependent on exports that it’s ever been,” said Hugh Patrick, a professor at Columbia University in New York.

Source: METI

Japan Bottoming?

According to Daily FX, Japan's tertiary index:

Evaluates the monthly change in output produced by Japan's service sector. Japan's economy is very export based, because this report excludes manufacturing and only measures service industries catering mainly to domestic needs, the Tertiary Industry Index is a key indicator of domestic activity.

With that in mind, looking over the year to year April figures we see the massive collapse.



Now the good news... April showed a strong rebound in a number of areas, including information and wholesale / retail trade.



According to a Bloomberg piece:

“It’s becoming clearer that the economy has already hit bottom,” said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. “But the rebound will probably be lackluster in the absence of a solid recovery in profits, capital spending and consumption.”

Though yet again, we need to put this all in perspective:

Governor Shirakawa said last week that he’s “cautious” about the economic outlook because the pickup in demand may be temporary. Exports and production, while improving on a month- on-month basis, are about a third lower than last year’s levels.

Source: Meti

Japanese Export Dive or Just a Reversion to Mean Growth?

Bloomberg reports:

Japan’s exports plunged a record 49.4 percent in February as deepening recessions in the U.S. and Europe sapped demand for the country’s cars and electronics. Shipments to the U.S., the country’s biggest market, tumbled an unprecedented 58.4 percent from a year earlier, the Finance Ministry said today in Tokyo. Automobile exports slid 70.9 percent.

The collapse signals gross domestic product may shrink this quarter at a similar pace to the annualized 12.1 percent contraction posted in the previous three months, the sharpest since 1974. Prime Minister Taro Aso is compiling his third stimulus package as companies from Toyota Motor Corp. to Panasonic Corp. fire thousands of workers.

I chose to show it in linear scale because I don't necessarily believe trade is based on compounded growth (such as the case with GDP or equity price levels), BUT I was requested to do so, so here is...

In this case, it appears Japan has in fact reverted well through the long term pattern.

Is it possible this is just the end of the "globalization bubble"?

Source: TSOJ

Japanese Production Shows a Worsening Global Recession

Bloomberg:

Japan’s recession deepened last month as companies cut production, consumers spent less and fewer people looked for work.

Factory output fell 3.1 percent from September, when it rose 1.1 percent, the Trade Ministry said today in Tokyo. Household spending slid 3.8 percent, the eighth consecutive drop.

Companies surveyed said they plan the sharpest production cuts in 35 years as exports decline in the wake of the worst financial crisis since the Great Depression.

Looking at the year over year change in some of the components of Japan's Industrial Production, one can see the rapid decline in the production of consumer goods over the past few months, trailing similar declines seen in both construction and capital goods.

Specific areas contibuting to this decline according to METI (Ministry of Economy, Trade, and Industry were (in order):

1. Transport equipment
2. Electronic parts and devices
3. General machinery

The Japanese economy is very dependent on exports, thus tends to be a decent barometer for global growth. This in itself, was expected, but troubling nonetheless. Back to Bloomberg:

Japan’s economy shrank last quarter, entering the first recession since 2001. The International Monetary Fund predicts the U.S., Europe and Japan will all contract next year, the first simultaneous downturn since World War II.

Data Source: METI

Japanese Economy Crashes... Hard

Can't wait to hear how this awful release contained some green shoots. My guess is "this marks a bottom", but don't count out "imports were down". Bloomberg details:

Japan’s economy shrank at a record 15.2 percent annual pace last quarter as exports collapsed and consumers and businesses cut spending.

The contraction followed a revised fourth-quarter drop of 14.4 percent, the Cabinet Office said today in Tokyo. Gross domestic product fell 3.5 percent in the year ended March 31, the most since records began in 1955, confirming that the recession is Japan’s worst in the postwar era.

Exports plunged an unprecedented 26 percent last quarter, forcing companies from Toyota Motor Corp. to Hitachi Ltd. to cut production, workers and wages. Stocks have gained 32 percent since reaching 26-year low in March on speculation worldwide interest-rate reductions and spending by governments will halt the slide in the world’s second-largest economy.

Two areas of "growth" were imports (or the lack thereof - i.e. addition by less subtraction) and government consumption (well... sorta - it's that small light blue speck).



My overall take... whenever exports detract 10% and 15%, in back to back quarters, from an "export nation", things are worrisome.

Update: The Financial Times went with Green Shoot #1 (hat tip Naked Capitalism):

However, with government spending growing, inventories falling and exports expected to stabilise after falling a record 26 per cent between January and March, many analysts believe that the worst is over and the economy could already have returned to growth in the current quarter.

Drastic production cuts by Japanese manufacturers have finally succeeded in outpacing the collapse in demand, Wednesday’s data showed, with destocking of inventories contributing a negative 0.3 percentage points to GDP growth in the first quarter.

While such inventory reduction made the headline GDP figure look even worse, it means that companies are making progress in clearing their decks and should soon be able to increase production to meet actual demand.

Source: esri.cao.go.jp

Help Jake Understand: Yen Intervention Edition

The WSJ details:

The yen plummeted against the dollar Wednesday after Japan intervened in currency markets for the first time in more than six years.

The dollar gained more than 3% against the Japanese currency after having dropped Tuesday to its lowest level in 15 years vs. the yen. Japan's Ministry of Finance said it would intervene again Thursday in currency markets if necessary.

Concerns over the pace of the U.S. recovery have recently sent investors flocking to the perceived safety of the yen, especially as investors speculate whether the Federal Reserve could implement another round of asset purchases to kick-start a moribund economy, which would likely weigh further on the dollar.

First of all... I am many things and a currency expert is not one of them...

With that said... I completely understand why Japan is intervening in the currency markets for economic purposes (a strong yen is hurting exports), BUT isn't the ability to literally print an overvalued piece of paper the ultimate prize?

For years, counter-fitters have printed worthless paper in the hopes of using it to buy things of value, but with Japan they can do this legally! Why not open up the printing presses and use that new currency to buy goods of value from abroad (I'm not talking other currencies, I'm talking REAL assets)?

To me this will result in at least one of the following (though, I'm sure there are 1000 more):

• A weaker Yen (i.e. the goal)
• Inflation (i.e. the best thing that could happen to Japan so that monetary policy would actually work)
• Nothing to the Yen or to inflation, which means you got a bunch of real assets... for free.

What am I missing?

Source: Yahoo Finance

Japanese Trade Shows Mixed Balance

Bloomberg report:

Japan’s export growth accelerated to 45.3 percent in February, led by Asian demand that increased the likelihood the economic recovery will be sustained.

The year-on-year increase was faster than January’s 40.8 percent, the Finance Ministry said today in Tokyo. The median estimate of 17 economists surveyed by Bloomberg News was for a 45.7 percent gain.

Imports climbed 29.5 percent in February from a year earlier, resulting in a trade surplus of 651 billion yen ($7.2 billion). The median estimate of 22 analysts surveyed was for 560.6 billion yen.

The strong export growth was driven by a large jump in exports to the United States (as well as the above mentioned Asian demand), but unlike Asian (including China below), trade did not flow both ways with the United States. The below chart shows the collapse in trade (imports and exports) between the United States and Japan during the crisis and the lack of a full rebound in exports to the United States and absolutely no budge in imports from the United States.



Source: Customs.GO

Japanese Unemployment (and Employment?) Drop

The Good

Bloomberg details:

Japan’s unemployment rate unexpectedly fell in January.

The jobless rate dropped to 4.9 percent from a revised 5.2 percent in December, the statistics bureau said today in Tokyo. The median forecast of 25 economists surveyed by Bloomberg News was for the rate to be unchanged from a preliminary 5.1 percent.

A decline in the unemployment rate is one of the first signs that a rebound in exports is starting to benefit workers, whose job prospects falter last year during Japan’s worst postwar recession. It may still be too early to expect “clear improvements” in the labor market because companies still have excess workers, said economist Tatsushi Shikano.

The Bad

According to Trading Economics:

The unemployment rate is defined as the level of unemployment divided by the labour force. The employment rate is defined as the number of people currently employed divided by the adult population (or by the population of working age).

And the decline is purely the fact that the number of those participating in the workforce has also declined (thus the employment rate has declined along with the unemployment level).



Source: Stat.GO


Update:

GetYourselfConnected asks which is more ironic:

• The US follows the Japan QE fighting deflation war to no avail for years on end
• Japan copies US data reporting to show better than expected results with cooked books

I'll go with a tie

Japanese Export Recession

Bloomberg reports:

Japan’s current-account surplus narrowed in February as the global recession eroded demand for the nation’s exports.

The surplus shrank 55.6 percent to 1.117 trillion yen ($11 billion) from a year earlier, the Ministry of Finance said in Tokyo today. The median estimate of 24 economists surveyed by Bloomberg News was for a gap of 1.07 trillion yen. Japan had a 172.8 billion yen deficit in January, its first in 13 years.

The world’s second-largest economy is headed for its worst recession since 1945 as plunging overseas demand forces companies from Nissan Motor Corp. to Panasonic Corp. to cut production and fire workers. Confidence among Japan’s biggest manufacturers fell to a record low in March and executives signaled more spending and job cuts, the Bank of Japan’s Tankan survey showed last week.

Source: Customs.Go.JP

China Central Bank Advisor: "Why are we piling up these IOUs if they may default?"

Naked Capitalism via Bloomberg:

It has been conventional wisdom that China, Japan, and other countries that run trade surpluses with the US, which means they fund our overconsumption by buying assets like US Treauries, would never restrict the flow of credit to us because it would lower their exports and hurt their growth. We've long been leery of the idea that unsustainable trends will have a life eternal, and Brad Setser has a simple reason why this process is self-limiting. Our foreign funding sources aren't just lending us money to buy their goods; they are also providing the funding for interest on the loans extended for past imports. At a certain point, the interest payments become so large relative to the value of the exports that the deal no longer makes sense.

The day of reckoning may be approaching well before Setser's tipping point. And the trigger is much simpler. We look like a lousy risk. The Freddie/Fannie conservatorship, the Lehman bankrutpcy, and the rescue of fallen Asian powerhouse AIG has, not surprisingly, lead to a reassessment of the US's creditworthiness

Just how large is Asian exposure?

Thus, the need for an agreement to prevent panic sales (I wonder if an Asian "T-Bill" bailout fund is next):

Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding...."We are in the same boat, we must cooperate," Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''

Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return.

Japanese Production Takes a Breather

Bloomberg details:

Japan’s industrial production retreated in February, snapping an 11-month winning streak that helped to secure a recovery from the country’s worst postwar recession.

Factory output declined 0.9 percent from January, when it rose 2.7 percent, the most in eight months, the Trade Ministry said today in Tokyo. The median estimate of 24 economists surveyed by Bloomberg News was for a 0.5 percent drop.

The slide is unlikely to last as Asian demand for the country’s electronics and machinery continues to fuel exports, Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo, said before the report was published. Factory output and exports have yet to return to their peak set two years ago, and the recovery remains plagued by deflation.

While today's 0.9% slide wasn't a surprise to the upside like yesterday's consumption release, it also wasn't that unexpected considering the huge jump we saw in January (industrial production is still up considerably from December's figure).



Putting it all together...

The good news is production is up considerably from lows. The bad news is how far things fell (i.e. can businesses operate profitably at these new levels). Relying on the United States for recovery is a concern, but the benefit of being situated near a red-hot China allows room for optimism.

Source: METI.Go

Japanese Industrial Production Up

Marketwatch with the details:

The increase to a seasonally adjusted index level of 70.6 marked the first gain in industrial output for Japan in six months and may be a sign that Japan's decline in production and exports are slowly coming to an end.

The data came in better than consensus. Economists surveyed by Bloomberg News had expected a milder 0.8% increase in Japan's March industrial output.

"The fact that IP is rising is hardly surprising, though, as the extremely sharp fall in previous months was an over-adjustment," said Andreas Schuster, strategist at CLSA in Tokyo.

However, the bad news is "that a recovery to a level that brings capacity utilization back to a ratio that ensures good profitability will be taking a very long time," he said.

Source: METI