The economy of Japan could have a good 2015 but what then?

Today has seen quite an outpouring of economic data from the land of the rising sun as Japan produces official data of many types. The headline is the GDP (Gross Domestic Product) report for the final quarter of 2014 but before we get to it I wish to add some perspective. This was a quarter which saw something of extraordinary benefit for Japan so let me describe it. The price of oil as expressed by the Brent Crude benchmark fell by 9%,19% and then 18% in the last three months of 2014 which as I pointed out on the 1st of December. The section below is from back then.

What about Japan?

A fall in the oil price is likely to be extremely welcome for an economy which imports more than 90% of the energy it uses. The US Energy Information Agency describes it thus.

Japan is the world’s largest liquefied natural gas importer, second largest coal importer, and third largest net oil importer.

So we have an immediate thought that Japan may be the biggest gainer from the oil price decline. For example its trade position will improve as the cost of the energy imports fall and this will provide a boost to economic output as net trade is a factor in Gross Domestic Product measurements. Also there will be a reduction in costs for Japan’s producers and manufacturers as they look to compete on the world stage. We can try to put this into numbers as according to the EIA the state of play is this.

Japan consumed nearly 4.6 million barrels per day (bbl/d) in 2013, down from 4.7 million bbl/d in 2012

So in US Dollar terms the daily cost to Japan has fallen from US $506 million to US $317.4 million. Quite a drop is it not as we see the economic boost? Of course this is just the boost from oil’s fall but we have something of a handle on quite a positive change for Japan. Sadly the meddlers have been meddling and the story begins but does not end there.

Returning to today’s analysis what I mean by the meddlers is that part of the economic philosophy of the Japanese government and the Bank of Japan is to push the Yen lower via expanding the money supply. In this instance a lower Yen means that the boost provided by the lower price of oil is offset to some extent. Over the quarter the fall in the Yen against the US Dollar was approximately 9% which needs to be factored against the oil price fall. Perhaps the Japanese authorities will update us on this particular own goal but perhaps not!

Other Commodity Prices

These peaked at the beginning of May 2014 at a level of just under 505 for the Commodity Research Bureau index and by the end of 2014 had fallen to 438. So whilst you could argue that the oil price fall was an increasing influence as the last quarter of 2014 developed the fall in other commodity prices was having an impact as it began.

The GDP data

Bloomberg summarises it thus.

Gross domestic product grew at an annualized 2.2 percent, less than a median forecast for a 3.7 percent increase. Nominal GDP, which is unadjusted for price changes, climbed an annualized 4.5 percent from the previous quarter.


So there was growth of 0.6% when measured on a quarterly basis which is to be welcomed as it brings Japan out of yet another recession. The period called the lost decade is now two decades long and it has had far too many recessions. Also if we take some perspective on 2014 the overall picture is not inspiring.

The economy shrank 6.7 percent in the three months after Abe increased the sales tax in April, and dropped 2.3 percent in the third quarter, according to Monday’s revised data.


However if we switch to debt metrics and recall the large public-sector debt burden then the Japanese establishment may not be too unhappy with the last quarter of 2014 as nominal GDP expanded at a fast rate. In other words inflation as measured by the implied deflator was running at an annual rate of 2.3%. This of course is bad for the Japanese worker and consumer.

How is the Japanese worker doing?

Bloomberg has printed plenty of articles promising wage growth in Japan so it must have slipped its mind to publish the data. Let us therefore switch to the Wall Street Journal.

After taking inflation into account, real compensation was down 0.5% on year. Wage growth hasn’t kept pace with April’s sales tax increase and inflation caused by a sharply lower yen, diminishing consumer purchasing power and resulting in weak consumption.


It is not entirely true to say that Bloomberg completely ignored the issue as here is its version.

Economy Minister Akira Amari said employment and income conditions may continue to improve and conditions are falling into place for the economy to turn upward. It’s important that increased corporate profits lead to higher pay for workers, he said.


Of course if you keep predicting the same thing you will eventually be right but so far for Bloomberg they have predicted a lot of turned corners on a straight road. Ironically a dip in inflation in 2015 may help cover their embarrassment as it combines with a tightening labour market.

That howver reminds us of a theme of these times when labour market performance in terms of quantity -employment and unemployment- gives a very different picture to what the economic output figures paint. Also tightening labour markets have in the credit crunch era had less of an impact on wage growth than one would have previously expected. Often it is the rise of self-employment which is a factor.


This is a better category for Japan as it sees reductions in the price of commodities and oil for its exporting industries and also a more competitive value for the Yen. There is beginning to be an impact from this as there was an increase in exports of 2.7% in the last quarter of 2014. However more troubling was the fact that imports rose by 1.3% at a time when the cost of many commodities and oil was falling substantially so we will have to see how this plays out in future reports. Overall this was a boon as it added 0.2% to GDP growth under the category of net exports.

Industrial Production

This expanded in December by 0.8% compared to November and was therefore an upwards pull on the GDP report. Bit for a producing and exporting nation like Japan it is not so hot that the underlying index was at 98.7 on a seasonally adjusted basis compared to 2010=100.


Let me use the words of Bank of Japan Board Member Takehiro Sato  from a speech he gave in London last week.

Japan’s economy has continued to recover moderately as a trend……As for the outlook, it is expected to continue its moderate recovery trend.


An interesting way to describe the flatlining in 2014 don’t you think? Does he mean that 2015 will also show zero growth overall? If we move to prices we see another candidate for my financial lexicon of these times.

Second, my understanding is that in the assessment of the achievement of the Bank’s price stability target, what is important is not to focus on the specific price indicators..


So if you set a policy based on a target the target is apparently not especially relevant as the Bank of Japan prefers to look at something he admits it cannot measure.

It seems that there is no silver bullet for estimating people’s medium- to long-term inflation expectations,


Also I note his very cautious choice of language about wage growth.

More importantly, a basic wage-setting mechanism — base salaries are revised in line with price increases, which was almost forgotten under deflation — has started to revive in labor-management wage negotiations.


If we move on from the thoughts of Sato san who dissented against the expansion of Japanese Government Bond purchases to 80 trillion Yen per year there is much to consider.

The fall in the price of oil albeit one which has bounced back a little to around US $60 per barrel should give the economy of Japan a push forwards as 2015 progresses. The danger is that Abenomics takes the credit for something which it has in fact offset. Of course Abenomics and the Japanese establishment will be very happy to see the Nikkei 225 equity index close about 18,000 for the first time since 2008.

However there is trouble further ahead as the former head of the Tokyo Immigration Bureau Hidenori Sakanaka has been pointing out.

With little net immigration to offset a falling fertility rate, the population of over 127 million is set to plummet to just over 100 million by the middle of the century. The number of permanent foreign residents recently passed two million, or 1.57 percent of the total population, a tiny figure for a developed country. 





9 thoughts on “The economy of Japan could have a good 2015 but what then?

  1. hello shaun .

    I think if the rest of the world could follow Japans birth rate we’d all be better off .

    If they can pull off keeping just even steady the money they make and then reduce the population then they’d be better off as well

    more people does not make a rich country , look at India and China

    Look at even England history , after the black death wages increase and the people we better off

    ( not that I advocate mass death solutions ! )

    long term they’re going to try an build robots to help the old but the same tech will also mean each active worker will be more productive – isnt this the way its supposed to be ?

    ” 1.57 percent of the total population, a tiny figure for a developed country. ”

    are they doing well? Thinks about it , they make things and sell them , no natural resources to speak of , now compare to us ……. and our supposed re-balancing , you can see why we push housing so much , bloody stupid way to run an economy !

    Always need more people than houses – keeping supply and demand operating favourably


    • “I think if the rest of the world could follow Japans birth rate we’d all be better off ”
      Sorry Forbin, but you’re at the wrong end of the demographic.
      What Japan should do is to convince its elderly and its chronically sick (the biggest drains on resources) that they are protected against deadly diseases when they are not, and to keep schtum whilst they snuff it in their tens of thousands:

      Austerity takes a sinister turn.

      • 3% ! and they still give it !

        if the old in this country die off ( and I include myself ) in the tens of thousands then I’d posit we’d have a bank run as a sudden glut of housing becomes available thus destroying the economy as is (!!)

        but then the sudden release of the financial burden of caring for these people would help with the deficit , followed by a sudden realization we have too many health care workers leading to unemployment …….

        tricky , eh ?


        PS : but then again if we could restrict immigration like Japan and start to make something other than paper promises , we’d might find ourselves richer ….. naw thats just fantasy I can’t see the top 1% liking that at all ………

    • In engineering, they apply root cause analysis. House prices in England haven’t crashed due to scarcity. House prices did come down in the Spain, Ireland, Netherlands and USA, excluding places like Manhattan. The royal family have traditionally done very well out of a feudal rent seeking model. It’s that tradition contributing to a false scarcity of building land.

      Secondly, the British middle class is under financial assault from both sides. 40% tax becomes 50% when you calculate the effects of VAT, never mind council tax, fuel duty and train fares for many. Small wonder they struggle to have 1 or 2 children when you see childminding fees. The younger generations are being robbed blind by the ponzi pension system.

      But look at the incentives for never working or contributing. Don’t blame the immigrants because a few of them abuse the system – plenty of unemployable natives breed with the intention to abuse the system. It’s the system itself which is broken. Rents are excessive and the politicians cannot grasp the mettle and allow enough self build to break the royal monopoly. Housing benefit has 2 sides, and some landlords are milking and abusing this state largesse.

      • Hi ExpatInBG

        Back in the day the scarcity of usable land in Japan was the explanation for sky high prices and the rise of intergenerational mortgages. Back then no doubt it seemed it would go on forever and yet it all came crashing down in the end.

  2. Great column, Shaun. I especially liked your sentence: “So if you set a policy based on a target the target is apparently not especially relevant as the Bank of Japan prefers to look at something he admits it cannot measure.”
    The Japan residential property price index is released with a considerable lag, so it is too early to say if the falling oil price will impact the housing market. However, the October 2014 annual inflation rate was 1.0%, the same as September’s, as the monthly inflation rate was about -4%, as in October 2013. This is the first month since August 2013, when an increase in the RPPI has followed on a previous one. The condos index was flat from September 2014 to October 2014, but this led to an increase in the annual rate of price change from 9.8% in September to 10.7% in October, as there had been a 0.7% decline in the index in October 2014.
    The land and detached houses index showed a 1.0% annual decrease in October, as opposed to a 0.5% decrease in September. Tshe last month there was an increase in this component was August 2013.
    The divergence between the two components of the Japanese RPPI is almost too big to be believed. Abenomics does not seem to have succeeded in ending deflation in prices of homes outside the condo sector (granted, this was never the objective), while it seems to be blowing up a condo price bubble.

    • Hi Andrew

      We have yet another bipolar property market as condo prices (presumably where Tokyo ia overrepresented) go up whilst the rest of the property market struggles.Is the 2020 Olympics a factor? Otherwise it feels like yet another capital city house price bubble is being blown.

      • Our modern economies seem to create most of the jobs, especially the better paid jobs in a few big cities. The obvious advantages of shorter, quicker & easier commutes create demand/competition for residential accommodation.

        Whilst they keep providing the employment, cities like London, Tokyo, NY, Auckland, Sofia etc will command premium prices. I suspect a good statistician could prove co-relation between rising job vacancies and high residential costs…

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