There is much to consider in the land of the rising sun, Nihon. Firstly there is the stirring performance of its team in the Rugby World Cup which has been in marked contrast to that of England for example. By contrast the economic experiment called Abenomics after the Prime Minister Shinzo Abe continue to have more troubles than successes. Its original three arrows have started to look like duds as we peruse the economic environment as summarised by the Japan Times over the weekend.
The central bank will unveil the revisions in its biannual outlook report on economic activity and prices due Oct. 30, the Nikkei said. BOJ policymakers will cut the growth forecast to around 1 percent from 1.7 percent for the year ending March 2016, it reported. It also said the estimate for the following year would be cut from 1.5 percent.
This is a catching up with reality after the poor performance in the second quarter of this year that I reported back on the 17th of August.
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%. (Later it was revised to 0.3% and 1.2% respectively)
Even worse was the fact that the exports fell as opposed to the hopes of a rise under the policy of driving the Yen lower. Although we need some perspective here as the Yen fell to over 125 versus the US Dollar as opposed to more like 120 now. These days even the amounts quoted below apparently do not drive your currency lower. From the Bank of Japan.
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.
Regular readers will be aware that I had pointed out that there were several reasons for this to be a good year for Japan and for its economy to push forwards like its rugby scrum. The main one has been the fall in the oil price for an economy described like this.
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.
I did a back of the envelope calculation which suggested that the gain to Japan was of the order of US $225 million per day.
To this we can add the expansionary monetary policy of the Bank of Japan with the sort of numbers shown above. I hesitate to say full steam ahead as we may be on the verge of what Agent Smith from the The Matrix series of films would described as “More! More!”. An awkward element has been the way that a lower oil price gives a boost to the Japanese economy because of course it provides exactly the opposite effect to the higher inflation of Abenomics.If you believe both then may I suggest you sing along to the recently departed Errol Graham.
Everyone’s a winner, baby, that’s the truth (yes, the truth)
What about wages?
This to my mind is pretty much the crux of the matter. The supporters of Abenomics thought so too as we have been subject to a barrage of rhetoric on the subject along the lines of that they were just about to turn higher. Let us see how the Nikkei Asian Review reports today’s numbers.
Real wages, adjusted for inflation, rose just 0.2 percent year-on-year, slowing from a revised 0.5 percent gain in July, as nominal wages are slow to keep up with price increases of food and daily necessities, undermining the purchasing power of households.
So it is not convinced by the pattern and it does not appear to be convinced by the inflation numbers either! However we have a problem as we note the barrage of rhetoric we have received in the past. The last 2 months of real wage growth in Japan are indeed welcome but rather than any improvement in trend they in fact reflect the fall in inflation that has been seen.
If we look at wage growth as defined by Total Cash earnings it rose by 1.9% in July 2014 and 0.9% in July 2015 and if we move to August last year was 0.6% and this year was 0.5%. Ouch! Wage growth has in fact slowed on this basis. In essence the improvement has been falling inflation as the impact of the Consumption Tax rise fell out of the numbers and a lower oil price impacted. Ooops! So exactly the opposite of Abenomics which was supposed to provide gains from higher prices and inflation.
One can debate the mixture of real and nominal wage growth but let me put it another way. One area of relative success for Japan is its low unemployment rate of 3.4% so a thriving economy would push wages higher. Now let is consider real wage growth in the UK and US for example.
UK Office for National Statistics: Comparing the three months to July 2015 with the same period in 2014, real AWE (total pay) grew by 2.8 per cent.
US Department of Labo(u)r Statistics: Hourly earnings have risen by 2.2 percent over the year. (So real wages rose 2%).
There is an order of magnitude difference between the Anglo-Saxons and the Japanese here. Odd that as the Japanese numbers have apparently been about to surge for 2 years now. The Governor of the Bank of Japan seems to think that they already have.
the positive feedback loop between the increases in employment and wages and the rise in inflation.
Indeed he actually offered a critique of current wage rises although of course he did not put it like that.
Now firms are enjoying record profits and the labor market is in a full-employment condition.
Shouldn’t wages be surging?
At the same time, it is also true that the pace of increase in fixed investment and wages is lackluster in light of record profits.
What is the current outlook?
The Markit business survey series for September was concluded today so what do we learn from it?
The weaker increases in both the manufacturing and service sector was reflected in the Nikkei Composite Output Index which posted the lowest reading since April (51.2), down from 52.9 in August.
So Japan had a relatively good August but this faded in September. Still welcome in comparison to suggestions via weak official industrial output figures that Japan has returned to recession again.
Three New Arrows
If things we going so well we would not have seen this from Prime Minister Shinzo Abe back on the 24th of September. From The Japan Times.
Prime Minister Shinzo Abe said Thursday he has set out three new goals for “Abenomics” and will target a 20 percent increase in (nominal) gross domestic product to ¥600 trillion.
He also added three new arrows to his quiver.
The three new economic policy goals include: promotion of economic growth, child-rearing assistance to push up the low birth rate and social security measures to increase nursing facilities for the elderly.
Prime Minister Abe has kindly reminded us of the demographic issues that Japan faces and let me add in a national debt which is 246% of annual economic output or GDP (Gross Domestic Product). In here we see that difference between the collective experience which can be described as Japan Inc (Incorporated) and the individual. His promise is one which helps Japan collectively with its debts if we ignore the lack of timescale provided but as it is for nominal GDP the individual Japanese will fear higher inflation and perhaps lower real wages.
Moving with the Japan Inc theme it is not that Japanese companies cannot afford higher wages. From Governor Kuroda.
Japanese firms have been making record profits, exceeding the peak registered before the global financial crisis.
That coincides with some of the data from the latest Tankan survey.But if you take the view that Abenomics is an example of Japan Inc moving things to suit itself then the current situation is just fine and real wage growth will continue to disappoint. Thus the individual experience will continue to disappoint. Of course Japan is far from alone being on such a course.
Meanwhile along the lines of its performance in the rugby there is much to admire about Japan. Its long life expectancy and the way which its treats its older population for example. In many ways it truly is different to us and certainly thinks so itself! So there will be plenty more opportunities to sing along with Graham Parker and the Rumour.