After the horrible events of Friday night in France there has already been significant economic news from the land of the rising sun, Nihon or Japan today. This is the announcement that Japan has returned to recession and in fact has experienced a “quadruple dip” as this is the fourth time it has done so in the credit crunch era. This poses all sorts of questions for us to consider as we approach the third anniversary of the economic policy called Abenomics which was proclaimed as a solution to the economic travails of Japan and the concept of the “lost decade” which is now into its third incarnation.
Reuters puts it thus.
Official data on Monday showed the world’s third-largest economy shrank an annual 0.8 percent in July-September after a 0.7 percent contraction in the prior quarter, putting it firmly into recession – two consecutive quarters of declines.
If we look into the detail of this there is another factor which will trouble policymakers in Tokyo.
But capital expenditure fell 1.3 percent, more than a median market forecast of a 0.4 percent decrease, to mark a second declining quarter, and revealing the sluggish state of manufacturing investment.
This is significant because Japanese businesses are in general cash rich (354 Trillion Yen) at this time but as you can see they seem to prefer building up these balances to investing. This is not the theme we get from either the Japanese establishment or those who support Abenomics.
Consumption is growing
This is a more hopeful development for Japan as we see the Japanese consumer willing to spend a little more. There was growth of 0.5% on the previous quarter which helped to buttress the overall numbers. If we move to see why this is happening we see something rather awkward for the whole Abenomics concept so let us take a look at Japanese wages.
These have grown and registered a growth rate of 0.4% in September. Now this is hardly stellar and nothing like the UK or US but take a look at the pattern described by Japanese Macro Advisers.
Since the advent of the Abenomics, the wage growth in Japan has seen a consistent but slow improvement. In 2013, regular wages in Japan fell by 0.9%. In 2014, it still fell, but by only 0.1%. In 2015, it will probably turn to a positive rise, although barely positive.
So we see a rationale for a nudge higher in consumption but even here there are things to consider. Let me start with unemployment and the idea that on this measure Japan is pretty much at what we used to argue was full employment.
The unemployment rate in Japan has reached the lowest rate in 20 years and leading indicators such as new job offers indicate that more tightening ahead in the labor market.
Thus we see that wage growth is in fact very low once we allow for what is a tightening labour market. Also in what we might argue is Turning British wage growth is being held down by this.
As the wages of part-time workers are lower than those of full-time workers, a larger share of part-time workers mean a lower average wage for all.
The Bank of England might have written that. However we see that however you spin it wage growth is low.
What about real wages?
As inflation is pretty much zero we see that Japan has finally crawled to a smidgen of real wage growth which has helped consumption. The catch is that it has done so via a doppelgänger to the claims of Abenomics. Lower consumer inflation has boosted real wages rather than a beneficial cycle from inflation of 2% per annum leading to higher nominal wage growth which in some unspecified fashion was supposed to provide real wage growth.
We of course do not know what wage growth would be if Abenomics had driven consumer inflation higher but we do get hints from the unwillingness of Japanese businesses to push wages higher when they not only can afford to but the labour market looks tight.
What about trade?
This should be the year that trade in Japan surges and pushes economic output higher. There have been two clear wins for it in 2015. The most obvious is highlighted below by the US Energy Information Agency.
It is the third largest oil consumer and net importer in the world behind the United States and China. Furthermore, it ranks as the world’s largest importer of liquefied natural gas (LNG) and second-largest importer of coal.
Accordingly there has been quite a boost in 2015 from falling prices for oil and coal as the whole energy price envelope changes and Japan can buy much cheaper energy. Although of course energy would be even cheaper if Abenomics had not driven the value of the Yen lower.
On the other side of the coin exports should be benefiting from much cheaper costs as not only energy prices but many commodity prices have fallen. This should be adding to the comparative advantage provided by a lower Yen on the foreign exchanges. Yet if we look at quarterly export growth in 2015 so far we see 1.9%, -4.3% and now 2.6% which is far from what would have been hoped for.
As a general point the issue of the responsiveness of exports to what is a competitive devaluation has changed in the credit crunch era. My country the UK had disappointments following its 2007/08 depreciation and Japan looks to be on the same road. Do businesses place a lower emphasis on current exchange-rates in their long-term plans? I believe so. As we wonder how long it takes for a move to be considered permanent?
Also there is the issue that when the Yen was strong Japanese businesses responded by sending production abroad to countries such as Thailand. So the situation changed unfavourably for Japan.
What is the outlook?
Yutaka Harada of the Bank of Japan spoke last week and I note this summary from him..
Thus far, I have shown that QQE has helped Japan’s economy recover, albeit at a moderate pace.
Not exactly a claim of triumph is it for a policy which is described as “bold action”?! For newer readers QE has been around the block a bit in Japan quite a few times and therefore QE became QQE in the way that in the UK the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield. After all declaring QE14 to be a success begs the question of 1-13 especially if the claims are only for “moderate” success. Looking forwards the prospects for GDP growth look moderate too.
1.2 percent for fiscal 2015, 1.4 percent for fiscal 2016, and 0.3 percent for fiscal 2017.
The business surveys or purchasing managers indices are positive too as this from Markit highlights.
At the sector level, both manufacturers and service providers forecast greater expansions in activity over the year.
The catch is that they were positive also over the period just gone when the economy shrank.
I want to bring in two big problems for Japan which are long-running themes on here. The first is the shrinking population which leads to arguments that we should look at GDP per capita. This has been better than the aggregate numbers because the population stopped growing and then fell. Should this continue as seems likely in 2016 and the Japanese economy does grow then GDP per capita will outperform again as the population shrinks. Just to give you an idea of the scale of the move the population shrank by another 215,000 in the six months to October.
Another feature of this is an ageing population which shifts the balance against Japan even if the population was stable. Some think of this in chilling terms if we throw in the thoughts of Bank of England Chief Economist Andy Haldane.
For the UK, that would suggest up to 15 million jobs could be at risk of automation. In the US, the corresponding figure would be 80 million jobs.
What about Japan Andy? Actually I am more upbeat than Andy as mankind is capable of leaps along the lines of “something wonderful” from the film 2001 A Space Odyssey and by definition we cannot project them. But until it happens Japan has in Taylor Swift terms “Trouble,Trouble,Trouble”.
Now in the second major issue we return to an aggregate measure which is the debt of the public-sector. There are varied different definitions but the IMF has it at 246% of GDP in gross terms and Japan continues to run a fiscal deficit which thIs year is estimated at around 6% of GDP. As Japan has assets the numbers look much better in net terms (126%) but with the ongoing deficit it is slip sliding away.
So let me sum up with the words of Lewis Carroll to describe the state of play for Japan.
My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.
Looked at like that is Abenomics simply the effort of an establishment determined to preserve a fantasy that overall economic growth is still available? Let us hope that “something wonderful” comes along soon as I do not see how having the monetary taps fully open does the job.