The last day or two has seen a flurry of economic news on Japan. If we look back it does share a similarity with yesterday’s subject Italy as economic growth in Japan has disappointed there too for a sustained period. The concept of the “lost decade” developed into “lost decades” after the boom of the 1980s turned to bust in the early 1990s. This is why Japan was the first country to formally start a programme of Quantitative Easing as explained by the St. Louis Fed in 2014.
An earlier program (QE1) began in March 2001. Within just two years, the BOJ increased its monetary base by roughly 60 percent. That program came to a sudden halt in March 2006 and was, in fact, mostly reversed.
This is what other western central banks copied when the credit crunch hit ( except of course overall they are still expanding ) which is really rather odd when you look at what it was supposed to achieve.
Inflation expectations in Japan have recently risen above their historical average. The Japanese consumer price index (CPI) in October 2013 was roughly the same as in October 1993. While Japan’s CPI has had its ups and downs over the past 20 years, the average inflation rate has been roughly zero.
The author David Andolfatto seems to have been a QE supporter and hints at being an Abenomics supporter as that was the time it was beginning.
However, some evidence relating to inflation expectations suggests that this time could be different.
We also see something familiar from QE supporters.
Essentially, the argument is that the BOJ was not really committed to increasing the inflation rate…………More generally, it suggests that QE policies can have their desired effect on inflation if central banks are sufficiently committed to achieving their goal. Whether this will in fact eventually be the case in Japan remains to be seen.
In other words the plan is fine any failure is due to a lack of enthusiasm in implementing it or as Luther Vandross would sing.
Oh, my love
A thousand kisses from you is never too much
I just don’t wanna stop
As the CPI index is at 101.1 compared to 2015 being 100 you can see that the plan has not worked as the current inflation rate of 1% is basically the inflation since then. Extrapolating a trend is always dangerous but we see that if the Bank of Japan bought the whole Japanese Government Bond or JGB market it might get the CPI index up to say 103. Presumably that is why QE became QQE in Japan in the same fashion that the leaky UK Windscale nuclear reprocessing plant became the leak-free Sellafield.
The good news is that Japan has had a period of this as the lost decades have been something of a stutter on this front.
But it is still the country’s eighth consecutive quarter of growth – the longest streak since the late 1980s.
Indeed if you read the headline you might think things are going fairly solidly.
Japan GDP slows to 0.5% in final quarter of 2017.
But if we switch to Japan Macro Advisers we find out something that regular readers may well have guessed.
According to Cabinet Office, the Japanese economy grew by 0.1% quarter on quarter (QoQ), or at an annualized rate of 0.5%.
Not much is it and I note these features from the Nikkei Asian Review.
Private consumption grew 0.5%, expanding for the first time in six months……….Capital expenditures by the private sector also showed an expansion of 0.7%, the fifth consecutive quarter of growth, as production activities recovered and demand for machine tools increased.
Whilst it may not be much Japan is keen on any consumption increase as unlike us this has been a problem in the lost decades. But if we note how strong production was from this morning’s update we see that there cannot have been much growth elsewhere at all. The monthly growth rate in December was revised up to 2.9% and the annual growth rate to 4.4%.
Troublingly for a nation with a large national debt there was this issue to note.
Nominal GDP remained almost unchanged from the previous quarter, but decreased 0.1% on annualized rate, the first negative growth since the July-September quarter of 2016.
Yes another sign of disinflation in Japan as at the national accounts level prices as measured by the deflator fell whereas of course the nominal amount of the debt does not except for as few index-linked bonds.
There was rather a grand claim in the BBC article as shown below.
Tokyo-based economist Jesper Koll told the BBC that for the first time in 30 years, the country’s economy was in a positive position.
“You’ve got wages improving, and the quality of jobs is improving, so the overall environment for consumption is now a positive one, while over the last 30 years it was a negative one,” said Mr Koll, from WisdomTree asset management company.
One may begin to question the wisdom of Koll san when you note wage growth in December was a mere 0.7% for regular wages and even more so if you note that overall real wages fell by 0.5% on a year before. So his “improving” goes into my financial lexicon for these times. You see each year we get a “spring offensive” where there is a barrage of rhetoric about shunto wage increases but so far they do not happen. Indeed if this development is any guide Japanese companies seem to be heading in another direction.
Travel agency H.I.S Co., for instance, is turning to robotics to boost efficiency and save labor. At a hotel that recently opened in Tokyo’s glitzy Ginza district, two humanoid robots serve as receptionists at the front desk. The use of advanced technology such as robotics enables the hotel, called Henn Na Hotel (strange hotel), to manage with roughly a fourth of the manpower needed to operate a hotel of a similar size, a company official said. ( Japan Times)
As we look at the situation we see that there is something foreign exchange markets seem to be telling us. The Japanese Yen has been strengthening again against the US Dollar and is at 106.5 as I type this. It is not just US Dollar weakness as it has pushed the UK Pound £ below 150 as well. Yet the Bank of Japan continues with its QE of around 80 trillion Yen a year and was presumably shipping in quite a few equity ETFs in the recent Nikkei 225 declines. So we learn that at least some think that the recent volatility in world equity markets is not over and that yet again such thoughts can swamp even QE at these levels. Some of the numbers are extraordinary as here are the equity holdings from the latest Bank of Japan balance sheet, 18,852,570,740,000 Yen.
So the aggregate position poses questions as we note than in spite of all the effort Japan’s potential growth rate is considered to be 1%. However things are better at the individual level as the population shrank again in the latest figures ( 96,000 in 5 months) so per capita Japan is doing better than the headline. If we note the news on robotics we see that it must be a factor in this as we wonder who will benefit? After all wage growth has been just around the corner on a straight road for some time now. Yet we have unemployment levels which are very low (2.8%).
As to the “more,more,more” view of QE ( QQE) we see that some limits are being approached because of the scale of the purchases.
Me on Core Finance TV