This morning has seen the opening of the major part of the European Central Banks (ECB) Quantitative Easing (QE) programme as it has begun its purchases of sovereign bonds. As it has apparently begun with purchases of the government bonds of Germany it is in danger of a major misfire as the German economy is in rather rude health right now as I discussed only last Monday. It certainly does not need the 2 to 3 billion Euros a week of German bond purchases that have just started. However another piece of news has been released this morning which questions the whole concept of QE. Let’s us therefore move our focus over to the serial QE offender which is of course the land of the rising sun or Nippon.
Today’s GDP data
Bloomberg reports it thus.
Gross domestic product expanded an annualized 1.5 percent in the three months through December from the previous quarter, less than a preliminary 2.2 percent, revised government data show.
So something of an ouch as if we move to our terms reported GDP growth was revised down from 0.6% to 0.4%. If we look into the detail we see that one of the supposed planks of the strategy called Abenomics is not going well.
Japan’s emergence from recession was weaker than first estimated as companies unexpectedly cut investment and drew down their inventories, offsetting a pickup in consumer spending.
So the “investment boom” has not turned up and this is awkward to say the least which is highlighted if we look as this morning’s speech from Bank of Japan Deputy Governor Hiroshi Nakaso and the emphasis is mine
Looking at the Financial Statements Statistics of Corporations by Industry, coupled with an increase in sales, the ratio of firms’ current profits to sales has recently reached around 5 percent for all industries and firms of
all sizes — a high level that exceeds that prior to the global financial crisis.
I do not know what is the Japanese for “fat cat” or for big business looking after itself but it does seem to be the case and this “pork barrel” approach was not supposed to happen. This was supposed to be so different to the problems of the first term of Shinzo Abe.
What is the underlying picture?
These numbers took us to the two-year point of Shinzo Abe’s government and of Abenomics and the economy in the last quarter of 2014 was 0.8% smaller than the last quarter of 2013 and overall the economy is only 1.5% larger. This looks like the struggles of the old Japan – which of course Shinzo Abe represents – rather than a new dawn of reform and accelerating economic growth. Back in May 2013 supporters such as Paul Krugman of the New York Times were lauding the progress.
So the overall verdict on Japan’s effort to turn its economy around is so far, so good
I wonder what they think now as the quote reminds me of the joke made by Steve McQueen’s character in the film the Magnificent Seven.
What is the Bank of Japan doing?
There are plenty of crossovers with the start of Euro area sovereign bond QE today as Deputy Governor Nakaso reminds us.
Let me summarize the transmission mechanism of QQE. The starting point of the mechanism is converting people’s deflationary mindset and thereby raising inflation
expectations through the strong commitment by the Bank to achieve the 2 percent target. At the same time, the Bank has been exerting downward pressure on nominal interest rates through its massive purchases of JGBs in order to encourage a decline in real interest rates and stimulate private demand such as business fixed investment. The idea is that, together with the increase in inflation expectations, this will lead to an increase in inflation rates.
Putting this rhetoric into action the monetary base in Japan was expanded by 10.4% between September 2014 and February 2015. Oh and as QE is something of a debased concept in Japan after all the false starts we have QQE or Quantitative and Qualitative Monetary Easing.
What about the Yen?
This has of course plummeted over the course of the Abenomics project and if we look at the data for the fourth quarter of 2014 there was an impact as net exports grew by 0.2%. But this morning more disappointing news came from the January figures where the current account surplus was a much lower than expected 61.4 billion Yen.
What about wages?
This has been a perennial problem in Japan which Abenomics was supposed to fix and many media outlets have told us has been fixed! However today’s GDP release has revised compensation of employees down from an already rather measly 0.1% growth to zero. Still many are still spinning for Shinzo Abe as this from the Financial Times earlier this month indicates.
Japan wage growth fastest in 15 years……Pay packets were up by 0.8 percent on a year ago…Basic wage growth is particularly important for Abenomics because workers are more likely to spend regular income than a one-off bonus.
So is Japan saved? Er no as those who bother to read further into the article discover.
Real wages were down 1.5 per cent because of last year’s rise in the consumption tax
So if we ignore the hype real wages continue to fall and in a mirror of what happened in Europe much of this is due to government policy. Yes the same governments who are telling us that they are trying to boost real wages!
Up is the new down again.
An Inconvenient Truth
Let me use the words of Deputy Governor Nakaso again.
Given that Japan’s crude oil imports in fiscal 2013 amounted to almost 15 trillion yen, a back-of-the-envelope calculation shows that with the decline in crude oil prices from about 100 dollars per barrel up until last summer to the recent level of about 50 dollars per barrel, the oil price decline represents an increase in annual income to Japan’s economy of more than 7 trillion yen.
Actually he is channelling a point I have been making for several months. But do you see the flaw? He had just spent several pages of his speech explaining how higher prices and 2% annual consumer inflation is good for Japan! So he is completely contradicting himself and in fact offering quite a good critique of the policy of the Bank of Japan. However he then gets himself in quite a mess.
This is why, from a longer-term perspective, falling oil prices will have a positive effect on economic activity
and will push up prices.
Up really is the new down here isn’t it?!
There are many similarities between Japan and Germany. They are exporting nations with ageing populations for example and now they have very similar government bond yields. So you might think that a policy which has not worked in Japan would be unlikely to work in Germany. This seems not to have bothered the ECB much as it starts down that road.
The irony is that like Germany the immediate future for the economy of Japan looks positive as I discussed on the 16th of February.
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.
To this we can now add the six-year low in the price of Iron Ore which took place last week which should benefit Japan and this was picked up in today’s business survey. The Eco Watchers Survey moved out of negative territory in February and the outlook was positive too.
The problem is that the boost has been provided by falling prices – oil and commodities – as it has in Germany. So raising prices via QE will have the reverse effect and slow the economy? Even worse QE in Europe may take the credit for an economic boost which was happening anyway and it may slow!