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.
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.