This is a story influenced by a brewing trade war but not the one that you might think. It is between Japan and Korea and the latest phase started in July when Japan imposed restrictions on trade with Korea for 3 chemicals. This gets more significant when you realise that they are crucial for smartphones ( displays on particular) and that according to CNBC Japan is responsible for 90% of the world’s supply of them. This affects quite of bit of Korean industry with Samsung being the headliner. Them Japan dropped Korea from its whitelist of trusted trading partners making trade more difficult before Korea did the same.
According to Bloomberg Citigroup have tried to downplay this today but I note these bits of it.
Meanwhile, boycotts in South Korea have led to a plunge in sales of Japanese consumer goods and a decrease in tourists to Japan, who may have decided to travel domestically instead, according to Citi………Last month, South Korean exports to Japan fell 14 percent, while imports from Japan slid 23 percent. South Korea’s trade ministry attributed the declines to industrial factors rather than trade actions.
Ah an official denial! We know what that means.
The issue has deep roots in the past and the Japanese occupation of the Korean peninsula a century ago as well as its later use of Korean “comfort women.” That explains the Korean issue with Japan and on the other side the Japanese consider themselves superior to Koreans and in my time there were quite open about it. Whilst he initially made moves to calm the situation there was always going to be an issue with a nationalistic politician like Shinzo Abe running Japan.But let us move on noting that both countries will be experiencing an economic brake.
Japan Economic Growth
Let me hand you over to The Japan Times which gives us the position and some perspective.
In the third quarter the world’s third-largest economy grew an annualized 0.2 percent, slowing sharply from a revised 1.8 percent expansion in April to June, according to preliminary gross domestic product data released by the government Thursday.
It fell well short of a median market forecast for a 0.8 percent gain, and marked the weakest growth since a 2.0 percent contraction in the July-September period last year.
So over the past six months Japan has grown by 0.5% and we also get an idea of the erratic nature of economic growth there.This is partly due to the way that Japan does not conform to stereotype as it has struggled more than elsewhere to measure GDP. Partly due to last year’s third quarter drop. annual growth has picked up to 1.3% but that looks like being the peak.
Why? Well the 0.2% growth was driven by a 0.9% rise in domestic demand ( both numbers are annualised) just in time for the consumption tax to be raised. Actually private consumption was up 1.4% in the quarter suggesting that purchases were being made ahead of the rise.
At the end of last month this was reinforced by this.
The Consumer Confidence Index (seasonally adjusted series) in October 2019 was 36.2, up 0.6 points from the previous month.
Yes it was up but you see the number had fallen from around 44 at the opening of 2018 and these are the lowest readings since 2011.
Korea Economic Growth
Real gross domestic product (chained volume measure of GDP) grew by 0.4 percent in the third quarter of 2019 compared to the previous quarter……Real GDP (chained volume measure of GDP) increased by 2.0 percent year on
year in the third quarter of 2019.
In a broad sweep this means that economic growth has been slowing as it was 3.2% in 2017 and 2.7% in 2018. Rather unusually Korea saw strong export growth especially of we look at what was exported.
Exports increased by 4.1 percent, as exports of goods such as motor vehicles and semiconductors expanded. Imports were up by 0.9 percent, owing to increased imports of transportation equipment.
Also manufacturing grew.
Manufacturing rose by 2.1 percent, mainly due to an increase in computer, electronic and optical products.
However the economy has been slowing and if either of those reverse will slow even more quickly. Back on the 18th of October we noted this response.
The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 1.50% to 1.25%.
This was more of an external rather than an internal move as last week we learnt this.
During September 2019 Narrow Money (M1, seasonally adjusted, period-average) increased by 0.6% compared to the previous month.
So whilst it had been weak as annual growth was 3.3% in June it has risen since to 5% which is slightly above the average for 2018.
However they could cut on inflation grounds as this from Korea Statistics shows.
The Consumer Price Index was 105.46(2015=100) in October 2019. The index increased 0.2 percent from the preceding month and was unchanged from the same month of the previous year.
According to the Bank of Korea the outlook is for more of the same.
The Producer Price Index increased by 0.1% month-on-month in September 2019 – in year-on-year terms it decreased by 0.7%.
Exchange Rate
This is at 10.68 Won to the Yen as I type this and is up over 7% over the past year. So an additional factor in the situation will be that the Korean’s have been winning the currency war. This of course, will be annoying for Shinzo Abe who’s Abenomics programme set out to weaker the Japanese Yen. As we stand Korea has an official interest-rate some 1.35% higher so there is not a lot the Bank of Japan can do about this.
Comment
As we stand it initially looks as if Korea will be the relative winner here.
“Domestic demand had made up for some of the weakness in external demand, but we can’t count on this to continue,” said Taro Saito, executive research fellow at NLI Research Institute.
“A contraction in October-December GDP is a done deal. The economy may rebound early next year, but will lack momentum.” ( Japan Times)
But the argument it is in a stronger position weakens somewhat if we switch to its Gross National Income.
Real gross domestic income (GDI) increased by 0.1 percent compared to the previous quarter.
Over the past year it has gone on a quarterly basis -0.3%,0.2%,-0.7% and now 0.1%.
Korea is looking to use fiscal policy to stimulate its economy which sets it in the opposite direction to the consumption tax rise in Japan. But as they use a time of trouble to posture and scrap let us look at something that they share.
Korea’s potential output growth is expected to fall further in the long term, as the productive population declines in line with population aging and the low fertility rate……In addition, it is necessary to slow down the decline in labor supply resulting from population aging and the low birth rate, through policy efforts including encouraging women and young people to participate in economic activities and coping actively with the low birth rate. ( Bank of Korea Working Paper )
I wonder what the latter bit really means?
Meanwhile this is the last thing Japan needs right now.
(Reuters) – Japan’s Nissan Motor Co Ltd (7201.T) has said it is recalling 394,025 cars in the United States over a braking system defect, causing concerns that a brake fluid leak could potentially lead to a fire.
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Shaun,
“In addition, it is necessary to slow down the decline in labor supply resulting from population aging and the low birth rate, through policy efforts including encouraging women and young people to participate in economic activities and coping actively with the low birth rate. ( Bank of Korea Working Paper )”
The UK prospered in the Victorian Industrial Revolution, children used to work from the age of 4 platting straw for hats and other simple tasks.
So in simple terms I think it means encouraging women and the younger generation to participate in generating work to maintain economic activity.
Conversely when you look at the mad ideas coming out of the UK suggested by Labour, which entail decreasing working days and hours!
This country is less productive than many countries abroad and that is not the way to grow yourself out of increasing debt when the baby boomers, pensions and next generation will have less money to save and pay for our social care system and healthcare!
Korea appears to realise that the UK doesn’t !
But when you have a load of monkey’s sitting in Parliament as we saw in that painting a month or two ago, what do you expect !
Question time in Parliament on the UK economy:
https://www.bing.com/videos/search?q=banksy+monkey+painting&view=detail&mid=F1496A3AFD38399AC76AF1496A3AFD38399AC76A&FORM=VIRE
Hi Peter
What struck me about the Japanese GDP growth figures was that both we in the UK and Germany have been like that for the last year or so. Maybe we need to acknowledge reality that growth is slow and adjust to it rather than forever twisting monetary policy chasing what now looks like a mirage.
Very wise response.
QE and low and even negative interest rates can only go on for so long then the bubble will eventually burst.
This is what happened in the last financial crisis something had to give but even so we haven’t pulled through it at all it looks like its the second round.
Great blog as usual, Shaun. You note that South Korea’s strong real GDP growth of 0.4% for 2019Q3 is somewhat undermined by its weak real gross domestic income (GDI) growth of 0.1%. For sure, since even people who are unconvinced that the real GDI is a valid measure of national well-being have to admit that it is a useful leading indicator of real GDP growth. The real GDI label is unfortunate, but the series itself is very useful, representing the real GDP adjusted for gains (or losses) in terms of trade. Canada is the only G7 country in the Anglosphere that calculates real GDI, whch is a shame. The Bank of Canada Monetary Policy Report always references it along with real GDP, and in preference to the more broadly based real income series, real gross national income. The US Bureau of Economic Analysis has always marched to its own drummer, but it is somewhat surprising that the ONS doesn’t publish real GDI estimates, as they should do, to be in compliance with the European System of Accounts (ESA) standards. (The ESA guidelines are essentially the same as the UN SNA2008 guidelines with regard to real income,) The ESA mandates real net national disposable income as the broadest measure of real income, and the ONS gets there, with an adjustment for terms of trade changes, but without any explicit derivation of a real GDI series.
Hi Andrew
Yes GDI has its uses as one Fed economist discovered back in 2011.
“Since the start of the recession, GDI has proved the more accurate depiction of US economic performance, according to Nalewaik’s work. As better data have become available and the Bureau of Economic Analysis (which calculates both) has accordingly revised its earlier estimates, it is GDP that has been adjusted in the direction of GDI rather than the other way round.
Neither measure was perfect, but early GDI estimates were much closer than GDP to later revisions of both measures. Perhaps more tellingly, GDI started signaling an economic slowdown in the middle of 2007 even as GDP kept climbing. Early GDI estimates also turned out to better reflect the severity of the recession.” ( FT Alphaville)
I remember asking the UK ONS if I could get a UK series to see if it was similarly useful only to be told that Nigel Lawson when he was Chancellor had directed that the numbers should not be released, in case they scared the horses or the like. I agree with you that it would be useful to have and would not take much effort only the will to do it.
Thank you for a reference to the Nalewaik paper, Shaun. It looks like it has merit but he is really pursuing a different idea. The US BEA defines real GDI just as gross domestic income deflated by the deflator for gross domestic product based on expenditures. What the Canadian SNA, and it would seem the South Korean SNA, in keeping with SNA2008 conventions, calls real GDI is real GDP adjusted for changes in terms of trade. This is what the US BEA call command-basis real GDP, and sorry, it seems the US BEA does calculate a series for it. What the Canadian SNA, in keeping with SNA conventions, call real GNI is what the US BEA calls command-basis real GNP. For them, real GNI would be nominal GNI deflated by the GNP deflator. Again, I like the BEA terminology better in these cases. As I said, it is confusing, but if anything it strengthens the case for the ONS calculating a real GDI series. It is the only G20 country in the Anglosphere that doesn’t calculate a real GDI series now. (Australia publishes a real GDI series too.)