Much has been happening in recent times in the Pacific region. Only last week we saw the Chinese add a new feature to the Currency Wars theme as they announced several lower fixings for the value of the Yuan/Renminbi. This will have been noted in the land of the rising sun as Japan has been a playing of this particular game or strategy since the election of Prime Minster Abe. There the policy of Abenomics involves monetary expansion, currency depreciation and economic reforms. The first two “arrows” are of course interlinked and the third is something which is rather doubtful especially when being pursued by someone with such close ties to “old” Japan.
As their currencies cannot simultaneously fall against each other there is an issue as they both try to gain a competitive advantage. Added to this as we look at Japan is the theme of Quantitative Easing as I am reminded of last week’s concept of “To Infinity…and Beyond” as Japan which has been using it on and off since 2003 has been the longest user of it. We have an ominous note here as the name has been changed from QE to QQE rather in the manner that Windscale become Sellafield. If you do not like reality change the name and doge the Google searchers!
The latest Bank of Japan Minutes give us an update of the scale of what is taking place here early in proceedings.
In this situation, the amount outstanding of the monetary base had been in the range of 320-326 trillion yen.
There was a time when such numbers seemed enormous! Also on such a scale let us give them the benefit of the doubt over the 6 trillion gap. I note that the Bank of Japan is keeping the pedal depressed towards the metal.
The monetary base had increased significantly as asset purchases by the Bank had progressed, and the year-on-year rate of growth had been at around 35 percent.
But whilst the communique tries to put a positive front on matters something significant is contained with it.
Many members shared the recognition that quantitative and qualitative monetary easing (QQE) had been exerting its intended effects.
In a place where “face” is an important concept it is no small thing that we seen that there are public expressions of doubt. These doubts are established in the sentence below.
On the other hand, a few members said that the effects of monetary easing on lowering real interest rates were diminishing.
As interest-rates have been effectively zero for quite some years the only change here can be that expectations of inflation have declined. Whilst both readers and I may welcome that this is not the case at the Bank of Japan wedded as it is to aiming for a consumer inflation rate of 2% per annum.
What is inflation?
The numbers for this speak for themselves.
The consumer price index for Ku-area of Tokyo in July 2015 (preliminary) was 102.0 (2010=100), down 0.2% from the previous month, and up 0.2% over the year.
I am using the Tokyo numbers as we get those ahead of the national ones. If we look at last weeks Producer Price numbers we see that in July they fell by 0.2% meaning that the annual rate was -3% driven mostly by a 7.1% fall in import prices. Thus we note that there continues to be downward pressure on consumer inflation from this source.
The oil price fall should be an enormous boon
As it is such a large energy importer Japan may be the country which gains most of all from the fall in the oil price. Last December 1st I described it thus.
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 it should be the country which most welcomes the fact that the price of Brent Crude Oil is below US $49 as I type this and that WTI (West Texas Intermediate) is below US $42. Back in December I estimated the gains from the oil price fall on its own.
So in US Dollar terms the daily cost to Japan has fallen from US $506 million to US $317.4 million.
If we bring that up to date the current daily cost is around US $ 225 million giving Japan quite a boost and offsetting the impact of the Fukushima disaster at least in economic terms. On that subject last week saw the first restart of a Japanese nuclear power plant since Fukushima.
Today’s GDP data
This morning Japan’s Cabinet Office informed us that GDP had fallen by 0.4% in the second quarter of 2015 which is often reported as an annualised fall of 1.6%. If look into the detail then CNBC covers it here.
External demand subtracted 0.3 percentage point from GDP growth, while domestic demand erased 0.1 percentage point.
It was not supposed to be that way as monetary easing was supposed to boost domestic demand and the Yen depreciation was supposed to boost exports and trade. Still apparently there was a very familiar culprit.
Most of Japan experiences a rainy season in June, but while that’s an annual occurrence, some reports said there were more rainy days than usual this year.
The government blamed the slow down in China and more intriguingly the United States whilst also presenting rather an odd statement for a body which claoms that inflation is good for Japan.
Amari also noted that a rise in food prices may be discouraging consumers from increasing spending,
If we step back for some perspective then GDP was 0.7% higher than a year ago. But if we look at the overall picture for Abenomics then the clouds reappear as in the second quarter of 2013 GDP was 527 trillion Yen and in the same quarter this yet it was 528.4 trillion Yen. Rather than the promised surge we seem to be seeing this as Talking Heads strike up a tune.
We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride
It was not supposed to be this way as Japan was supposed to be projected by Abenomics onto a new higher growth plain along the lines of the first quarter which was revised up to a growth rate of 1.1%. However it was preceded by a 2014 where the economy flatlined and has been followed by one where it shrank. Noticeable here is that we begin to escape the initial impact of the rise in the consumption tax.
A big factor has been the behaviour of wages which have struggled. In today’s data there was something a little more hopeful. From the Wall Street Journal.
Employee compensation, or the sum of wages paid to both regular and nonregular workers during the quarter, increased 0.7%.
However one member of the Bank of Japan is not so convinced.
the rate of increase in bonus payments had decelerated
compared with last year, when it had shown high growth
So we will have to wait and see.
What we do know is that there is dissent at the Bank of Japan with one member voting to reduce the flow of QQE just as the pressure will some from the government for “More,More, More”. So far it has allowed Prime Minister Abe to sing along with the Rolling Stones as it is under his thumb but Abenomics overall is more in tune with this.
I can’t get no satisfaction
I can’t get no satisfaction
‘Cause I try and I try and I try and I try
I can’t get no, I can’t get no
You may note that this is without looking at the important and interrelated issues of demographics and the national debt.