Japan's Nominal Economy Approaching 20 Year Low

Bloomberg details:

Japan’s economy shrank more than estimated in the first quarter after the March 11 earthquake and tsunami disrupted production and prompted consumers to cut back spending, sending the nation to its third recession in a decade.

Gross domestic product contracted an annualized 3.7 percent in the three months through March, following a revised 3 percent drop in the previous quarter, the Cabinet Office said today in Tokyo. The median forecast of 23 economists surveyed by Bloomberg News was for a 1.9 percent drop.

The March disaster hit an economy already weighed down by years of deflation and subdued consumer spending.

While real GDP was down 3.7% in the quarter (annualized basis), nominal GDP was down an even higher 5.2% due to continued deflation. The chart below shows that nominal GDP is now at an almost 20 year low, hitting the lowest point since June 1991.



For a country indebted with an increasing amount of nominal debt, it makes you wonder how they will ever be able to get out of this situation.

Source: ESRI

Japan's Lost Decade(s)

BusinessWeek details the latest:

Japan’s gross domestic product fell less than estimated in the fourth quarter in a pullback that may prove temporary as overseas demand revives production after the nation fell behind China as the world’s second-largest economy.

The annualized 1.1 percent drop in GDP in the three months through December was driven by a slowing in exports and fading of government stimulus programs, Cabinet Office figures showed today in Tokyo. The median forecast of 26 economists surveyed by Bloomberg News was for a 2 percent drop.

Source: ESRI

Japanese Economy Grows... Nominal GDP Back to 1993 Levels

Bloomberg reports:

Japan’s economy grew more than forecast in the third quarter as consumer spending increased, shielding the expansion from a stronger yen and export slowdown likely to have a greater impact this quarter.

Gross domestic product rose an annualized 3.9 percent in the three months ended Sept. 30, following a revised 1.8 percent expansion in the previous quarter, the Cabinet Office said in Tokyo today. In nominal terms, the economy grew 2.9 percent.

The article goes on to detail that a lot of the growth was due to a purchases of fuel-efficient cars ahead of an expiration of a subsidy.

Longer term we see the remarkable fact that Japanese GDP in nominal terms is right where it was in Q3 1993 (yes 17 years ago), while real GDP is just 18% higher over that same time frame (less than 1% annualized growth).



Source: ESRI

China Passes Japan as 2nd Largest Economy

Bloomberg reports:

Japan’s economy grew at less than a fifth of the pace economists estimated last quarter, pushing it into third place behind the U.S. and China and adding to evidence the global recovery is faltering.

Gross domestic product rose an annualized 0.4 percent in the three months ended June 30, slowing from a revised 4.4 percent expansion in the first quarter, the Cabinet Office said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg News was for annual growth of 2.3 percent.

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

Japanese Recovery Fading?

Bloomberg details:

Japan’s industrial production and household spending slipped in May and the unemployment rate unexpectedly increased, in signs that the recovery of the world’s second-largest economy may slow.

The figures underscore Japan’s reliance on exports to propel its rebound, and follow calls by the U.S. for Japanese policy makers to stimulate domestic demand. For Prime Minister Naoto Kan, facing a mid-term election in less than two weeks, the figures may pose a warning that it’s too soon to tighten fiscal policy to shrink the nation’s debt.

The jobless rate reached 5.2 percent in May, the third straight monthly increase and the highest level since December, the statistics bureau said in Tokyo. Household spending retreated 0.7 percent from May 2009, the office also said, a day after another report showed retail sales slowed last month.

The chart of unemployment by age group also shows the structural issue facing Japan as a slowing economy and aging population makes it more difficult for younger workers to break into the workforce.



Source: Stats.Go.JP

Continued Widespread Deflation in Japan

Bloomberg details:

Japan’s consumer prices fell for a 13th month in March, indicating the economy remains hampered by deflation even as the export-led recovery starts to spread.

Prices excluding fresh food slid 1.2 percent from a year earlier, after dropping 1.2 percent in February, the statistics bureau said today in Tokyo. The result matched the median estimate of 28 economists surveyed by Bloomberg News.

Source: Stat.GO

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 Consumer Showing Signs of Life

Bloomberg details:

Japan’s retail sales gained at the fastest pace in more than a decade in February as the economic recovery spread to households.

Sales rose 4.2 percent from a year earlier, the Trade Ministry said today in Tokyo. That was the biggest monthly jump since March 1997, when they advanced 12.4 percent, according to Bloomberg data. The median estimate of 12 economists surveyed was for a 1.6 percent climb.

An export-fueled recovery and government stimulus spending are beginning to create jobs and support wages, improving prospects for companies including Dydo Drinco Inc. A turnaround in employment will continue to support consumer spending, according to economist Julian Jessop.

From a month earlier, retail sales unexpectedly climbed 0.9 percent, the second consecutive gain. None of the eight economists surveyed by Bloomberg News predicted an increase, and their median estimate was for a 1.2 percent drop.

Consumer confidence advanced for a second month in February, led by sentiment about employment, a sign households may boost outlays in coming months as fears of being fired recede. Japan’s economy added the most jobs in more than three decades in January, unexpectedly sending the unemployment rate to a 10- month low of 4.9 percent. Workers’ pay declined at the slowest pace in 19 months.

While the 4.2% year over year jump is against a collapsed low, the fact that the Japanese consumer has come back to near pre-crisis spending levels is encouraging for any lasting recovery.



Source: Meti.GO

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

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 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

Japan's Economy Grows... or Does It?

NY Times details the headline Q4 figure:

The Japanese economy grew at an annualized pace of 4.6 percent in the final quarter of 2009, preliminary numbers showed Monday, as a rebound in exports helped alleviate fears of a “double-dip” recession.

As detailed above, the growth was led by exports which jumped an astonishing 20% annualized over the period.



So how can a 4.6% increase not mean the economy actually grew?

The starting point.

Third quarter GDP was reported to have grown 4.8% back in November. As I noted back then, the number looked odd as nominal GDP was negative even with that 4.8% real growth due to deflation.

Now it appears that 4.8% growth never happened.

Tokyo has come under increasing pressure to address wild variations in its readings of gross domestic product: In the third quarter last year, the government initially said the economy had grown a robust 4.8 percent, only to revise that rate down to reflect no growth or decline. The latest numbers, the government says, have been adjusted for more accuracy.

Subtract that 4.8% growth and add in this quarter's 4.6% growth and you get... well, no growth from the level of GDP reported back in Q3.

Over the longer period, we do see a slow normalization. However, anytime nominal growth is under this much pressure in an indebted nation (a nation's debt must be paid back in nominal terms, thus with nominal growth), there is still a lot of concern going forward.

Source: ESRI

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

The Real Lost Decade: Japanese GDP Edition

I found the following piece from Martin Gremm (a longer bit than I normally post, but interesting), which details how Japan reacted to the initial bubble popping in their economy in the early 1990's and the pain it caused not then (important), but 10 years later (i.e. the beginning of the most recent 10 year period).

The government's response to the financial crisis inflated the national debt from 65% of GDP in 1992 to 180% in 2005. The Debt to GDP ratio has held steady near these levels since then.

Currently, Japan spends about 24% of their annual budget on interest payments. Any significant increase in interest rates would push this expense into crippling territory, but so far rates have shown little inclination to rise.

A decade of long-term interest rates in the low single digits should lead to inflation, but in Japan inflation has been very tame. We can understand why this is the case by looking at how money flows through the Japanese economy.

The first major difference between the US and Japan is that the savings rate in Japan is very high and many Japanese invest their savings into government debt. Ninety-three percent of the Japanese national debt is held internally. This would be unthinkable in the US because consumers are themselves over-leveraged and can't lend much to their government.

Japanese banks tend to use deposits to buy government bonds rather than lending them out to consumers. Presumably this reflects a reluctance of individuals and businesses to borrow, and a reluctance of banks to lend to any but the most credit-worthy borrowers.

In effect, the Japanese population lends its savings to the government, either directly or by keeping its savings in a bank, which uses the deposits to buy bonds. Interest payments are usually reinvested back into government bonds.

This process creates significant demand for Japanese government debt, which keeps bond prices high and interest rates low. It also prevents inflation, because a lot of bank deposits are used to fund the budget deficit rather than consumer and business spending, which could drive up prices.

This unusual arrangement enabled Japan to sustain an inherently unstable situation for the last decade. If the Japanese population decides to spend money instead of saving it, or the banks decide to look for higher returns by lending to individuals and businesses, inflation and interest rates will rise and Japan will have to address its debt burden.

With this as a backround, Bloomberg reports on Japan's horribly revised GDP figure and the government attacking the problem of debt, with more debt:

Japan’s economy expanded less than a third of the pace initially reported in the three months to September as companies slashed spending.

Gross domestic product rose at an annual 1.3 percent rate, slower than the 4.8 percent reported in preliminary figures last month, the Cabinet Office said today in Tokyo. The revision was deeper than the predictions of all but one of the 17 economists surveyed by Bloomberg News.

Stocks fell after the report underscored concern about the sustainability of a recovery that is under threat from deflation and a rising yen. Prime Minister Yukio Hatoyama unveiled a 7.2 trillion yen ($81 billion) stimulus package yesterday to ensure the economy avoids another recession next year.

While EconomPic had stated that each of the last two quarter's figures looked "odd" (see Q2 and Q3 posts), there was NO clue that it was due to massive errors in their estimates. Trying to ignore this, the broader issue is what this all means with regards to the Japanese economy. Even with massive stimulus, the country can not "eek" out a positive nominal GDP print and is becoming closer and closer to the brink every month.

How bad? Over the last ten years, the Japanese economy has SHRUNK in nominal terms... that is in Yen, the Japanese economy produces less now than it did 10 years ago.



A smaller economy means they have less of an ability to service any level of nominal debt, all else equal. Yet as the first paragraph of this post indicated, Japan has taken the opposite path which I feel is HIGHLY instructive for a potential "slog through" period within the United States should we continue to move down the path of ever increasing debt loads within the household and public sectors, without corresponding economic growth.

The question I keep asking myself with regards to the United States and Japan... where will this growth come from?

Source: ESRI

1.2% over 10 Years?

Per Bloomberg:

Japanese bonds rose, following their best monthly performance this year, after the Bank of Japan said it will hold an emergency policy meeting today in Tokyo.

Ten-year yields dropped to the lowest level since January on optimism policy makers will expand extraordinary measures to increase liquidity in the financial system. The central bank may consider increasing monthly debt buying from the current 1.8 trillion yen ($20.7 billion), said Christian Carrillo, a senior interest-rate strategist at Societe Generale SA in Tokyo.

“They cannot come out of that meeting without doing anything and my guess is that it will be more purchases of long- term JGBs,” Carrillo said. The BOJ may boost monthly buying of government bonds to 2.1 trillion yen, he said.

The yield on the 1.4 percent bond due September 2019 fell 3.5 basis points to 1.225 percent at the 11:05 a.m. morning close in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker.

While the chart below is the 7-10 year Japanese Government Bond Index (rather than just the 10 year yield, which I was unable to find), it does show how low yields are, BUT more amazing, how much lower they can potentially go (think 2002).



This almost makes that 3.2% yield on 10 year Treasuries seem attractive huh?

Source: Barclays

Japanese Industrial Production Up, but Disappoints

Bloomberg reports:

Japan’s industrial production rose less than economists estimated in October, undermining the nation’s recovery from its deepest postwar recession.

Factory output increased 0.5 percent last month from September, the slowest pace in eight months, the Trade Ministry said today in Tokyo. The median estimate of 27 economists surveyed by Bloomberg News was for a 2.5 percent gain.

The decline, led by automakers and electronics parts companies, adds to concern that the economy may slow once global stimulus spending wanes. Bank of Japan Governor Masaaki Shirakawa and Prime Minister Yukio Hatoyama will meet “soon” to discuss how to address a surging yen and slumping stock market, Chief Cabinet Secretary Hirofumi Hirano said today.

“These are weak numbers,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “We’ve been seeing a V-shaped recovery so far, but the pace is starting to moderate.”

Below we see the speed and size of the recovery. While the six month change is still up ~15%, the size of this change has begun to reverse course. While not only indicating that we should not be looking for a "V" shaped recovery, it also puts how large the decline in output really was last Fall.



Source: METI

Japanese GDP... 4.8% Growth, but Ugly?

EconomPic detailed Japan's odd Q2 GDP print in which real GDP rebounded to positive territory for the first time since Q4 2007, even as nominal GDP continued to contract:

This has happened before (but real GDP has never been higher, while nominal GDP was negative).

That is... until this release.



The issue with any recovery in real only terms is that the country's debt (and there is a ton in Japan) remains in nominal terms. Thus, the fact that Japan produced more (4.8% quarter over quarter annualized more in real terms), but the overall value of that production is still less in Yen terms (-0.3% in nominal space) makes it difficult to service that debt. It is not a surprise then that the cost of credit insurance on Japanese sovereign debt has risen during this "recovery". Per the WSJ:

Canary in the coal mine? The cost of insuring Japanese government bonds against default has doubled to 0.75 percentage point in the past three months, as markets fret about debt issuance. Credit risk is assuming ever-greater stature in government-bond markets previously blithely assumed to be risk-free.

Its debt-to-gross-domestic-product ratio is set to rise to a staggering 227% in 2010, the International Monetary Fund forecasts, making it particularly exposed to any rise in market interest rates. Japan's aging population is a crucial concern, driving a change from saving, much of which went into JGBs, to consuming.

Japanese government officials seem to share the concern that the "strong" print may not be all it initially seems. Per Bloomberg:

The acceleration in the world’s second largest economy is projected to fade in coming quarters as the impact of stimulus spending wanes and job losses restrain consumer spending. Prime Minister Yukio Hatoyama said the economy remains “worrisome” and that another supplementary budget is “probably” warranted.

I second that and will repeat the question I posed last quarter; how strong is end-user demand really if the price deflator increases GDP a full 5% quarter over quarter (annualized)?

Source: ESRI

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 Tertiary Index Shows Strength

RTT News details:

An index measuring tertiary industrial activity in Japan was up 0.3 percent in August compared to the previous month, the Ministry of Economy, Trade and Industry said on Monday, posting an index score of 97.1.

That beat analyst expectations for a 0.1 percent monthly increase following the revised 0.7 percent increase in July - which was originally reported higher by 0.6 percent.

The index incorporates data from firms involved with wholesale and retail trade, financial services, health care, real estate, leisure, and utilities.

The largest jump in the index was in professional services, led by civil engineering and architectural services (of which geological survey services jumped a massive 46%) offset by continued weakness on the consumer side.



Source: Meti