Overnight the agenda for today was set by news out of the land of the rising sun or Nihon. Oh and I do not mean the effort to reproduce the plot line of the film Alien ( Gaijin) for those poor passengers on that quarantined cruise ship. It was this reported by the Asahi Shimbun.
Gross domestic product declined by a seasonally adjusted 1.6 percent in the quarter from the previous three months, or an annualized 6.3 percent, the Cabinet Office figures showed.
The contraction of 6.3 percent was far worse than expectations of many private-sector economists, who predicted a shrinkage of 4 percent or so.
Just to clarify the quarterly fall was 1.6% or using the Japanese style 6.3% in annualised terms. What they do not tell us is that this means that the Japanese economy was 0.4% smaller at the end of 2019 than it was at the end of 2018. So quite a reverse on the previous trend in 2019 which was for the annual rate of growth to pock up.
The Cause
Let me take you back to October 7th last year.
After twice being postponed by the administration of Prime Minister Shinzo Abe, the consumption tax on Tuesday will rise to 10 percent from 8 percent, with the government maintaining that the increased burden on consumers is essential to boost social welfare programs and reduce the swelling national debt. ( The Japan Times )
I pointed out back then that I feared what the impact of this would be.
This is an odd move when we note the current malaise in the world economy which just gets worse as we note the fact that the Pacific region in particular is suffering. We looked at one facet of this last week as Australia cut interest-rates for the third time since the beginning of the summer.
As you can see this was a risky move and it came with something of an official denial of the economic impact.
about a quarter of the ¥8 trillion cost of the 2014 hike, according to the government and the Bank of Japan.
The 2014 rise in the Consumption Tax ( in rough terms the equivalent of VAT in the UK and Europe) had hit the Japanese economy hard, so the official claim of that the new impact would be a quarter was something I doubted. Now let us return to the Asahi Shimbun this morning.
Japan’s economy shrank in the October-December period for the first time in five quarters, as the sales tax hike and natural disasters pummeled personal consumption, according to preliminary figures released on Feb. 17.
The exact numbers are below.
Personal consumption, which accounts for more than half of Japan’s GDP, grew by 0.5 percent in the July-September period.
But the figure plunged to minus 2.9 percent for the three months from October, when the government raised the consumption tax rate to 10 percent from 8 percent.
We had previously looked at the boost to consumption before the tax rise as electrical appliances in particular were purchased. This will have flattered the economic data for the third quarter of last year and raised the GDP growth rate. But as you can see the party has had quite a hangover. On its own this would have led to a 2.2% decline in quarterly GDP.
The spinning has continued apace.
Yasutoshi Nishimura, minister in charge of economic revitalization, gave a positive outlook for personal consumption in a statement released on Feb. 17.
“The margin of decline in personal consumption is likely to shrink,” he said.
As John Lennon points out in the song Getting Better.
It can’t get no worse
As ever there is a familiar scapegoat which is the weather.
Destructive typhoons that hit eastern Japan and the warmer winter also fueled the slowdown in personal spending, such as purchases of winter clothes.
Although as @Priapus has pointed out there was an impact on the Rugby World Cup and the Japanese Grand Prix.
Investment and Exports
These will be on people’s minds as we try to look forwards. According to the Asahi Shimbun the situation for investment is also poor.
Investment in equipment by businesses, for example, shrank by 3.7 percent, a sharp decline from a rise of 0.5 percent in the preceding quarter, while housing investment tumbled 3.7 percent from an increase of 1.2 percent.
New housing starts have also been waning since the tax hike.
Many companies’ business performances are deteriorating, particularly in the manufacturing sector.
The business investment fall was presumably in response to the trade war and the deteriorating conditions in the Pacific economy we looked at in the latter part of 2019 and of course predates the Corona Virus. By contrast the Bank of Japan like all central banks will be more concerned about the housing market.
Switching to trade itself the position appears brighter.
In contrast, external demand pushed up GDP by 0.5 percentage point.
But in fact this was due to imports falling by 2.6% so a negative and exports fell too albeit by a mere 0.1%. That pattern was repeated for the annual comparison as exports were 2.2% lower than a year before and imports 4.3% lower. It is one of the quirks of the way GDP is calculated that a fall in imports larger than a fall in exports boosts GDP in this instance by 0.4%. Thus the annual comparison would have been -0.8% without it.
Comment
Sometimes the numbers are eloquent in themselves. If we look at the pattern for private consumption in Japan we see that it fell from 306.2 trillion Yen to 291.6 trillion in the first half of 2014 as the first tax rise hit. Well on the same seasonally adjusted basis and 2011 basis it was 294 trillion Yen in the last quarter of 2019. If we allow for the fact that 2014 saw a tax based boost then decline then consumption in 2019 had barely exceeded what it was before the first tax rise before being knocked on the head again. Or if you prefer it has been groundhog day for consumption in Japan since 2013. That is awkward on two counts. Firstly the Japanese trade surplus was one of the economic world’s imbalances pre credit crunch and expanding consumption so that it imported more was the positive way out of it. Instead we are doing the reverse. Also one of the “lost decade” issues for Japan was weak consumption growth which has just got weaker.
This leaves the Japanese establishment in quite a pickle. The government has already announced one stimulus programme and is suggesting it may begin another. The catch is that you are then throwing away the gains to the fiscal position from the Consumption Tax rise. This poses a challenge to the whole Abenomics programme which intended to improve the fiscal position by fiscal stimulus leading to economic growth. I am sure you have spotted the problem here.
Next comes the Bank of Japan which may want to respond but how? For newer readers it has already introduced negative interest-rates ( -0.1%) and bought Japanese Government Bonds like it is a powered up Pac-Man to quote the Kaiser Chiefs, But the extent of its monetary expansionism is best highlighted by this from Etf Stream earlier.
According to the BoJ funds flow report for Q3 2019, the bank now owns some 8% of the entire Japanese equity market, mostly through the current ETF-buying programme.
Hence the nickname of The Tokyo Whale.They think the rate of buying has slowed but I think that’s an illusion because it buys on down days and as The Donald so regularly tweets equity markets are rallying. Just this morning the German Dax index has hit another all-time high. But what do they do next? They cannot buy that many more ETFs because they have bought so many already. As you can see they are already a material player in the equity market and they run the Japanese Government Bond market as that is what Yield Curve Control means. Ironically the latter has seen higher yields at times in an example of how water could run uphill rather than down if the Bank of Japan was in charge of it. It will be wondering how the Japanese Yen has pretty much ignored today’s news.
Also as a final point. More and more countries are finding it hard to raise taxes aren’t they?
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So the Japanese government owns 8% of the Japanese stockmarket and will have to keep buying as it tries to prevent the market crashing (ahem… correcting), when would they stop – perhaps when there are no more shares to buy, oh but that would be total state ownership and control , so that can’t be happening as that would be errrrrrr…… communism??The ECB have bought so many bonds that Germany is paid to borrow and Greek government bonds have a lower yield than US Treasuries implying that the Greek government is a better credit risk than the USA!!!!, can’t see a problem there can you?
Over in the US, the Fed is monetising the US government debt Zimbabwe style, but can deny it since it does so through intermediaries (by buying the treasuries after the banks have bought them off the Treasury), the stockmarket is also being artificially supported and buying is done covertly by the plunge protection team on drops so that there is now barely a down day at all and if there is one, it is soon reversed, what was traditionally considered bad news for the stockmarket is now considered good news since market participants expect the Fed to print more money every time the market is threatened, the worse the news, the better for the stockmarket.
In addition to that, company’s are also buying back their own shares with literally free money borrowed from the Fed, a practice that was illegal a few years ago, and taken to its logical conclusion, eventually there will be no stockmarket as the companies will have been privatised by their own directors, with the holders of the few remaining shares before they are de-listed owning the entire company.
Take Apple for example, after Tim Cook took charge he and the board realised they did not have to innovate, develop new products and invent the “next big thing”, they could merely make tweaks to existing products and increase the price every year as the members of the Apple cult – sorry customers – would buy anything they made at literally any price, add in the buybacks every year and hey presto a flat earnings report becomes a one of growing earnings thanks to the magic of free money from the Fed.
But all this is requiring more and more intervention as the system of controlling markets becomes increasingly unstable and difficult and the amounts of money required to do so grows exponentially,eventually leading to UBI and governments handing out free money, initially to prevent house prices falling, but as the collapse progresses, it will be welfare for all as the purchasing power of their money loses its value at an ever increasing rate,full blown communism masquerading as capitalism is in the pipeline I fear.
Hi Kevin
Japan has been the test case for central bank intervention and it is struggling. Each time they try to strengthen the tax base the economy takes a dive but they have already bought so many assets. Who will they ever sell them too? The other issue with buying equities is that unlike bonds they do not mature so what will they do with them? Also you eventually end up as major shareholders in companies.
Switching to Apple who have released some bad news tonight the way they have been allowed to deliberately turn down older products is shocking.
Hello Shaun,
so maybe the lemonade bug will tip the world into recession – even if its relatively mild ?
forbin
Hi Forbin
If we do go into recession then it looks like the weather will get a break and the Corona Virus will take the blame. However plenty of places had ropey ends to 2019 and Japan had already taken a dive. So we were in trouble anyway although of course the mainstream view was just we had turned a corner just like they told us in 2019. Oh hang on…