Today has seen already some developments which will be regarded ruefully in Tokyo. Of course such things are an ever-growing list out there but one is a combination of an own goal and changes in the UK situation. The own goal is the way that the Japanese Yen has rallied since the Bank of Japan announcement that it would cut (some) interest-rates to -0.1%. The initial impact saw its effective or trade-weighted index drop just below 128 but now it is more like 135 according to the Bank of England. Ooops! Even worse if we switch to the UK where Brexit rumours have had the UK Pound £ imitating the Grand Old Duke of York this weekend ( he marched them up to the top of the hill and he marched them down again…) take a look at what has happened . The first quote is from the 29th of January for me.
If we switch to the UK then the Pound £ has gained 3 Yen from 170.3 to 173.3.
The one below is from Brenda Kelly on Twitter this morning.
*GBP/JPY DROPS 1.5% TO 159.682, LOWEST SINCE NOV. 2013
Down is indeed the new up!
If we recall that one of the arrows of Abenomics is a more competitive currency there is food for thought in those numbers. Indeed we can go wider whilst also being more local to Japan as I note The Japan Times picked this out for an opinion piece.
Ongoing uncertainty about renminbi devaluation is fueling fears that deflationary forces will sweep through emerging markets and deliver a body blow to developed economies,
I wonder what developed country in particular they were worried about?
Some truth about the stock market and Abenomics
I have made the case for some time that another supposed arrow for Abenomics has been a rising stock market. We can link this in my view directly to the fact that one of the objectives of what is called QQE in Japan – in case you are wondering QE bit the dust at around QE 14 in the way that Windscale became Sellafield in the UK – is a rising stock market to generate hoped for wealth effects. This morning the Japanese Finance Minister has apparently been rather explicit on the subject.
@DailyFXTeam Japan Finance Minister Aso: Stock prices are the clearest indicator of Abenomics
Indeed Aso san then went even further.
@DailyFXTeam Japan Finance Minister Aso: Stock prices are a leading indicator, Do not know if stock prices show reality.
I wonder what “reality” he is looking for! But if we take his view there are more than a few issues here. Let is start with stock prices being a leading indicator. From Bloomberg.
Since the BOJ’s Jan. 29 move, the benchmark Topix index has plunged more than 7 percent.
Those are numbers after last week’s strong rally so let us look further back for some perspective. Since this year began the Nikkei 225 has fallen 15.4% and it is some 10.6% lower than a year ago. Thus as we stand the leading indicator is negative and this is the clearest indicator of Abenomics according to the Finance Minister.
This was part of the Japanese economic revolution back in the day. But these days it has been buffeted by the swings in the value of the Yen and accordingly some of it has been exported to countries such as Thailand. This mornings sentiment and confidence update from the Markit Purchasing Manages Index was not particularly cheery.
Flash Japan Manufacturing PMI™ at 50.2 (52.3 in January). Flash headline PMI reading drops to eight-month low.
If we delve deeper into the report we are told this.
Latest data indicated only marginal growth in operating conditions at Japanese manufacturers………Data suggests that the fall in total new work intakes was caused primarily by a contraction in international demand, with new exports declining at the sharpest rate in three years.
This reminds of the problems Japan seems to be having with its trade position but before I get to that note the “contraction in international demand” bit which reinforces the discussions we have had on here concerning at best a decline in world trade growth and at worst an actual contraction.
Even the BBC has spotted that there might be an issue here.
The country’s value of exports fell by 12.9% in January from a year earlier, supporting concerns that the slowdown in China – one of the country’s most important trading partners – is continuing to hurt demand. Imports, meanwhile, fell by 18%.
They seem to miss that the deficit is lower and of course we do not have to look much beyond the lower oil price for that. After all Japan is an enormous energy consumer and importer. But this poses its own question as with a much lower import bill via lower oil and commodity prices Japan should be seeing a large trade boost especially if we add in the past declines in the value of the Yen. Bloomberg gives us a little more perspective here.
The trade balance, which swung back to a surplus of 140.2 billion yen ($1.2 billion) in December, was in deficit for nine months in 2015. Exports declined 8 percent in value last month and imports fell 18 percent. The annual trade deficit was 2.8 trillion yen.
Note that the surplus in December also saw a lower export value. Let us move on whilst noting that the troubled development above will be good for the GDP statistics on a year on year basis for a while.
What about wages?
This has been an area where the official and mainstream media view has been that wages growth is perpetually about to turn a corner. More than a few have argued it already has sometimes above evidence which suggests nothing of the sort. Meanwhile I continue to point out a much more difficult reality. From Japan News earlier this month.
The nation’s workers barely got a pay rise in 2015, with a 0.1 percent increase in cash earnings slower than the 0.4 percent bump in 2014. Total wages haven’t risen more than 1 percent since 1997 and they fell for the past four years once inflation is accounted for, the Health, Labor and Welfare Ministry said Monday.
Past problems with wage rises being low were ameliorated by inflation being pretty much non-existent. However the push for higher inflation under Abenomics makes workers worse off in the manner that the rise in UK inflation in 2010/11 that the Bank of England looked away from did as it pushed real wages and crucially the economy downwards. What are the prospects for 2016? From Reuters.
Japan’s automaker labor unions are reducing their demands for pay rises for the next fiscal year from amounts sought the previous year…….The labor union of auto giant Toyota Motor Corp , which sets the tone for annual wage talks across Japan, is seeking a 3,000 yen ($26.31) increase in monthly base pay, half of what was sought last year.
I am afraid that we have to tear another page out of the economics textbook here as Japan tells us it is pretty much at full employment. The unemployment rate is a mere 3.5% and Japan Macro Advisers tells us this.
The job offers to applicant ratio rose to 1.27 in December, hovering at the highest level since December 1991.
However care is needed as whilst it is some time now since I worked out that back then Japanese stores had lift attendants and people were employed to count those crossing bridge so full employment may be not all it seems.
Many media outlets are expressing concerns about Abenomics which represents quite a change from the previous cheerleading. However this is not a time for triumphalism as you see Japan does have strengths such as its full employment (with the caveat above) and the way it treats its elderly. But this from Japan Macro Advisers nails the previous hype about reform.
In reality, no significant structural reforms were executed. An attempt to deregulate the labor market was quickly abandoned. The rigid and uncompetitive service sectors remained untouched. No attempt was made to reform the public pension system, but it was instead used as a way to prop up the stock market.
Of course the media (especially the Financial Times which is now Japanese owned) may fear this. From the Guardian.
Only last week, the internal affairs minister, Sanae Takaichi, sent a clear message to media organisations. Broadcasters that repeatedly failed to show “fairness” in their political coverage, despite official warnings, could be taken off the air, she told MPs.
Meanwhile we have discussed on here the problems of long-term contracts and pension companies in a negative interest-rate world so here is The Yomiuri Shinbun.
The Bank of Japan’s negative interest rate decision has started affecting the life insurance market, with sales of some products such as whole-life insurance policies being suspended following the announcement.
I shall leave you with Alphaville.
Big in Japan, oo the Eastern sea’s so blue
Big in Japan, alright
Pay, then I’ll sleep by your side
Things are easy when you’re big in Japan
When you’re big in Japan