The Bank of Japan begins to face its failures

The last couple of weeks have seen two of the world’s main central banks strongly hint that the path for interest-rates is now lower, or perhaps I should say even lower. So as we open this week my thoughts turn eastwards to what the Shangri-Las would call the leader of the pack in this respect, Nihon or Japan. If we look at the Nikkei newspaper we see that Governor Kuroda of the Bank of Japan has also been conducting some open mouth operations.

TOKYO — Bank of Japan Governor Haruko Kuroda said extra stimulus would be an option if prices refuse to keep rising toward the central bank’s 2% inflation target.

The BOJ “will consider extra easing measures without hesitation” if the economy runs into a situation where momentum toward reaching stable inflation is lost, Kuroda said at a news conference on Thursday in Tokyo after keeping monetary policy unchanged.

There are various problems with this which start with the issue of inflation which has simply not responded to all the stimulus that the Bank of Japan has provided.

  The consumer price index for Japan in May 2019 was 101.8 (2015=100), up 0.7% over the year before seasonal adjustment,   and the same level as the previous month on a seasonally adjusted basis. ( Statistics Bureau).

This has been pretty much a constant in his term ( the only real change was caused by the rise in the Consumption Tax rate in 2014) and as I have pointed out many times over the years challenges Abenomics at its most basic point. If we stick to the monthly report above the situation is even worse than the overall number implies. This is because utility bills are rising at an annual rate of 3.2% but this is offset by other lower influences such as housing where the annual rate of (rental) inflation is a mere 0.1%. Also the services sector basically has virtually no inflation as the annual rate of change is 0.3%. Even the Bank of Japan does not think there is much going on here.

On the price front, the year-on-year rate of change in the
consumer price index (CPI, all items less fresh food) is in the range of 0.5-1.0 percent. Inflation expectations have been more or less unchanged.

Wages

On Friday we got the latest wages data which showed that real wages fell at an annual rate of 1.4% in April, This meant that so far every month in Japan has seen real wages lower than the year before. If we look back we see that an index set at 100 in 2015 was at 100.8 in 2018 so now may well be back where it started.

This matters because this was the index that Abenomics was aimed at. Back in 2012/13 it was assumed by its advocates that pushing inflation higher would push wages even faster. Whereas that relationship was struggling before the credit crunch and it made it worse. Indeed so strong was the assumed relationship here that much of financial media has regularly reported this it has been happening in a version of fake news for economics. The truth is that there has been an occassional rally such as last summer’s bonus payments but no clear upwards trend and the numbers have trod water especially after Japan’s statisticians discovered mistakes in their calculations.

Problems for economics

Back when QE style policies began there was an assumption that they would automatically lead to inflation whereas the situation has turned out to be much more nuanced. As well as an interest-rate of -0.1% the Bank of Japan is doing this.

With regard to the amount of JGBs to be purchased, the Bank will conduct purchases in a flexible manner so that their amount outstanding will increase at an annual
pace of about 80 trillion yen……….The Bank will purchase exchange-traded funds (ETFs) and Japan real estate
investment trusts (J-REITs) so that their amounts outstanding will increase at annual
paces of about 6 trillion yen and about 90 billion yen, respectively…….As for CP and corporate bonds, the Bank will maintain their amounts outstanding at
about 2.2 trillion yen and about 3.2 trillion yen, respectively.

Yet we have neither price nor wage inflation. If we look for a sign of inflation then it comes from the equity market where the Nikkei 225 equity index was around 8000 when Abenomics was proposed as opposed to the 21,286 of this morning. Maybe it is also true of Japanese Government Bonds but you see selling those has been something of a financial widow maker since around 1990.

Misfire on bond yields

2019 has seen yet another phase of the bond bull market which if we look back has been in play since before the turn of the century. But Japan has not participated as much as you might think due to something of a central planning failure.

The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain at around zero percent. While doing so, the yields may move upward
and downward to some extent mainly depending on developments in economic activity and prices.

That was designed to keep JGB yields down but is currently keeping them up. Ooops! We see that bond yields in Germany and Switzerland have gone deeper into negative territory than in Japan. If we compared benchmark yields they go -0.31% and -0.51% respectively whereas in Japan the ten-year yield is -0.15%.

Economic Growth

On the face of it the first quarter of this year showed an improvement as it raised the annual rate of economic or GDP growth to 0.9%. That in itself showed an ongoing problem if 0.9% is better and that is before we get to the fact that the main feature was ominous. You see the quarterly growth rate of 0.6% was mostly ( two-thirds) driven by imports falling faster then exports, which is rather unauspicious for a trading nation.

If we look ahead Friday’s manufacturing PMI report from Markit posted a warning.

June survey data reveals a further loss of momentum
across the manufacturing sector, as signalled by the
headline PMI dropping to a three-month low. Softer
demand in both domestic and international markets
contributed to the sharpest fall in total new orders for
three years. A soft patch for automotive demand…..

The last few words are of course no great surprise but the main point here is the weaker order book. So Japan will be relying on its services sector for any growth. Also there is the issue of the proposed October Consumption Tax hike from 8% to 10% which would weaken the economy further. So we have to suspect it will be delayed yet again.

Comment

To my mind the Abenomics experiment never really addressed the main issue for Japan which is one of demographics. The population is both ageing and shrinking as this from the Yomiuri Shimbun earlier this month highlights.

The government on Friday released a rough calculation of vital statistics for 2018, revealing that the number of deaths minus births totaled 444,085, exceeding 400,000 for the first time.

The latest numbers on Thursday showed yet another fall in children (0-15) to 12.1% of the population and yet another rise in those over 85 to 4.7%. In many ways the latter is a good thing which is why economics gets called the dismal science. The demographics are weakening as Japan continues to borrow more with a national debt of 238% of GDP.

The size of the national debt is affordable at the moment for two reasons. The first is the low and at times negative level of bond yields. Next Japan has a large amount of private savings to offset the debt. The rub is that those savings are a buffer against the demographic issue and there is another problem with Abenomics which I have feared all along. Let me hand you over to a new research paper from the Bank of Japan.

The reversal interest rate is the rate at which accommodative monetary policy
reverses and becomes contractionary for lending. Its determinants are 1) banks’
fixed-income holdings, 2) the strictness of capital constraints, 3) the degree of passthrough to deposit rates, and 4) the initial capitalization of banks.

So it looks like they are beginning to agree with me that so-called stimulus can turn out to be contractionary and there is more.

The reversal interest rate creeps up over time, making steep but short rate cuts preferable to “low for long” interest rate environments.

Exactly the reverse of what Japan has employed and we seem set to copy.

Podcast

Japan adds sharply falling imports to its continuing real wages problem

Today gives an opportunity to head east and look at what is sometimes considered to be the engine room of the world economy looking forwards. We can do so via an old friend which is Nihon the land of the rising sun. It is facing a situation where central banks in Malaysia, New Zealand and the Philippines have cut interest-rates this month. The latter cut was a reminder of different perspectives as we note this from The Business Times.

Gross domestic product (GDP) expanded 5.6 per cent in the first three months of the year, dragged by a slowdown in government spending, farm output, exports and the country’s budget deadlock. The pace was slower than the previous quarter’s 6.3 per cent and also the 6.1 per cent forecast in a Reuters poll…….On a seasonally adjusted basis, the economy grew 1.0 per cent in the January-March period from the previous quarter, far slower than the upwardly revised 1.8 per cent in the fourth quarter of 2018.

Of course Japan would get out it’s party hats and best sake for anything like that rate of growth but for it today’s story started well with this. From Reuters.

Japan’s economic growth unexpectedly accelerated in January- March, driven by net contributions from exports and defying forecasts for a contraction in the world’s third-largest economy.

At this point things look really rather good as in a time of trade wars growth from net exports is especially welcome. Before I get to that we may note that the forecasts were wrong by quite a wide margin but as we have a wry smile I would just like to add that initial GDP data in Japan is particularly unreliable. I know that goes against the national stereotype but it is an ongoing problem. The Bank of Japan thinks that the numbers have been consistently too low but the catch is that it is hardly an impartial observer after all its extraordinary monetary policies. For the moment,however we have been told this.

Japan’s economy grew at an annualized 2.1% in the first quarter, gross domestic product (GDP) data showed on Monday, beating market expectations for a 0.2% contraction. It followed a revised 1.6% expansion in October-December.

The Rub

The problem with growth from net exports as Greece discovered is that it can be a sign of contraction as it is here. Fortunately someone at Reuters seems to have learnt from my style of analysis.

The headline GDP expansion was caused largely by a 4.6% slump in imports, the biggest drop in a decade and more than a 2.4% fall in exports.

As imports fell more than exports, net exports – or shipments minus imports – added 0.4 percentage point to GDP growth, the data showed.

If we look further into the detail we see that this quarter exports knocked some 0.5% off GDP with their fall, although not everyone seems to think that if this from @fastFT is any guide.

 the world’s third-largest economy was boosted by better-than-expected exports.

Let us be kind and assume they though they would be even worse.

Returning to the main point we are now left wondering why imports were so weak. We get a partial answer from this.

Private consumption slid 0.1% and capital expenditure dropped 0.3%, casting doubt on policymakers’ view that solid domestic demand will offset the pain from slowing exports.

Lower consumption will have been a factor although I am much less sure about investment because public investment rose by 1.5% and total investment added 0.1% to the GDP growth figure. So as Japan needs basic materials and is a large energy importer we face the likelihood that industry is nervous about the prospects for late spring and summer and has adjusted accordingly. This from Nippon.com will not help.

The slump in China, which is the center of production and consumption in Asia, has spread to other countries in the region. Trade statistics for March 2019 show that exports to Asian countries (including China) fell by 5.5% compared to the same month the previous year, marking the fifth straight monthly decline since November 2018.

 

If you want a scare story the Japanese way of annualising numbers creates one because on this basis exports fell by 9.4% and imports by 17.9%.

Industrial Production

There was some better news on this from earlier as the preliminary report of a monthly fall of 0.9% in March was revised up to a 0.6% fall. But even so this meant that production was 4.3% lower than a year before. Thus we see why imports have dropped as the official views has gone from “Industrial Production is pausing.” to “Industrial Production is in a weak tone recently.”

The index is at 102.2 where 2015 = 100 but as recently as last October it was 105.6.

Wages

Low wage growth and at times declining real wages has been a theme of the “lost decade” era in Japan and January produced bad news for confidence in this area for both the numbers and the official data series. From the Nikkei Asian Review in late January.

A data scandal at Japan’s labor ministry has created further headaches for the Abe government in its protracted attempts to spur inflation.

The ministry’s Monthly Labor Survey overstated nominal pay increases in the first eleven months of 2018. Corrected monthly results released on Wednesday saw year-on-year wage growth drop by between 0.1 and 0.7 percentage point. Officials revised data for every month.

The new series has seen real wage growth accelerate downwards in 2019 so far starting with an annual fall of 0.7% in January then 1% in February followed by 2.5% in March. If we switch to wage growth on its own we see that the real estate sector was ht hardest in March with an annual fall of 5.9% followed by the finance and insurance sector where it fell by 4.6%.

The highest paid sector ( 446,255 Yen) in March was the utility one (electricity, heat and water).

This weaker set of data also has worries for those on us following at least partly on the same road as Japan as The Vapors once again remind us.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so
I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so

Comment

So far I have avoided financial aspects and only briefly referred to the Bank of Japan. It of course has been pursuing the policy of Abenomics for some time now but some of the arrows have misfired. Actually the case of currency depreciation may boomerang in some areas as we see a falling Chinese Yuan. Indeed the Japanese Yen has been rallying against the UK Pound £ which has been pushed back to the 140 level. Signs of economic weakness and trouble give us a stronger Yen as markets adjust in case the Japanese decide to take some of their large foreign investments home.

It is unclear how the Bank of Japan can help much with the current series of problems. For example its role of being the Tokyo Whale and buying Japanese equities on down days for the market is unlikely to do much about the real wages problem or the aging and shrinking population. Although the rhetoric of “powerful monetary easing” continues.

In addition, the Bank decided to consider the introduction of a facility for lending exchange-traded funds (ETFs) that it holds to market participants.  ( Governor Kuroda)

In reality that seems to be forced because it is on its way to buying them all!

While I will not explain these measures in detail today, they all will provide support for continuing with powerful monetary easing through the Bank’s smooth fund-provisioning and securing of market functioning.

Also if fiddling at the margins like this worked Japan would have escaped its lost decade years and years ago.

 

 

 

What happens when the Bank of Japan has bought everything?

It is time for another chapter of our Discovering Japan ( h/t Graham Parker and the Rumour) series and let us open by dipping into Japanese culture.

As spring approaches, the country’s weather forecasters face one of their biggest missions of the year: predicting exactly when the famed cherry blossoms will bloom.

The nation’s sakura (cherry blossom) season is feverishly anticipated by locals and visitors alike. Many tourists plan their entire trips around the blooms, and Japanese flock to parks in droves to enjoy the seasonal spectacle. ( Japan Times).

This is something which can be shared to some extent by users of Battersea Park as the Japanese Embassy financed an avenue of cherry blossom trees there in a nice touch of what is called cherry blossom diplomacy.

If we switch to financial news that will be considered good by the Bank of Japan, then we can see three factors at the moment. We can start with the equity market where the Nikkei 225 index has risen 126 points to 21,431 this morning. This means that the dip of the end of December is now only a bad dream for it as we recall that central banks love higher equity markets especially when in this case they have been buying it. Japan is a country that literally has a Plunge Protection Team as what has become called the Tokyo Whale makes equity purchases on down days.

If we switch to the currency then the Bank of Japan will be a lot happier than it was in mid-January. At that point markets had what we might call a yen for Yen and in a “flash rally” it went below 105 versus the US Dollar which rather suspiciously broke more than a few Japanese exporters currency hedges and to 132.5 versus the UK Pound £. As a central bank with an objective to weaken the yen under the Abenomics strategy this will have upset the Bank of Japan and it will be much happier with the 110.87 to the US Dollar as I type this. It would of course prefer an exchange rate over 120 as it managed for a while but with a summit due with President Trump that can be overlooked for now.

Next we can look at what is a strong candidate for the most rigged market on earth which is the Japanese Government Bond market. So far the Bank of Japan has purchased some 473,087,792.358,000 Yen’s worth of Japanese government securities in as near to monetary financing as a first world country has actually got. Whilst the pure definition of the treasury issuing debt to the central bank does not take place over time it starts to rather look like that in effect. Here is the current description.

yield curve control, in which the Bank seeks a decline in real interest rates by controlling short-term and long-term interest rates, has been placed at the core of the new policy framework.

This means that Japan can borrow effectively for nothing as its ten-year yield is -0.04% as I type this and therefore a lot of its debt is adding to the world total of negative yielding debt. Not all of it as the thirty-year yield is 0.58% but even that is very low and means that should it so choose Japan can borrow incredibly cheaply.

So Governor Kuroda can sleep soundly at night on these three grounds.

The economy

This is much less satisfactory as it shrank in the second half of last year as quarterly growth of 0.3% followed -0.7%. This meant that at the end of 2018 the annual rate of growth was zero or as their official statisticians put it. -0.0%. This is quite a slowing on the 2.4% recorded at the end of 2017 but if we take a broad sweep we see that all this monetary action of negative interest-rates and QQE doesn’t seem to be doing that much good. This theme will hardly be helped by this morning’s news.

The nation’s trade deficit for January grew from a year earlier with exports to China tumbling in their worst decline in three years, government data showed Wednesday.

Japan logged a trade deficit for the month of ¥1.41 trillion ($12.8 billion), 49.2 percent larger than a year before, the Finance Ministry said. ( Japan Times)

The January data is generally a weaker month due to the timing of the Chinese New Year but as you can see there has been a sharper impact this year as we get another perspective on the Chinese economic slow down.

But last month, “exports of products such as microchip-making devices that are not related to China’s New Year celebration fell, showing that Chinese companies’ spending on equipment and plants is falling,” Minami said.

Overall Japanese exports in January were 8.4% lower in January than in 2018 and this will be a further deduction from an already weak economic outlook. This adds to this from Reuters.

Data released on Monday showed core machinery orders, considered a leading indicator of capital expenditure, fell 0.1 percent month-on-month in December……

Highlighting bigger concerns about the external environment, however, was a 21.9 percent month-on-month slump in orders from overseas, the biggest fall since November 2007.

This had previously been a strong series but whilst domestic demand has continued foreign demand has not.

Demographics

We have looked at the consequences of an ageing and indeed shrinking population many times and here is a new perspective from the World Economic Foundation.

In 2018, there were 921,000 births and 1.37 million deaths, meaning Japan’s population fell by 448.000 people. That was its largest ever annual natural population decline.

The number of male workers in 2040 will fall by 7.11 million from 2017, while the number of working women will decrease by 5.75 million.

Or to add it all up.

As many as 12 million Japanese people may disappear from the country’s workforce by 2040, according to official estimates. That’s a fall of around 20%.

Comment

Let me open by advancing my theme that it would be better if Japan simply accepted reality rather than undertaking what are King Canute style actions. On this road it would accept that a shrinking and ageing population will have periods of economic decline in GDP terms.  In many ways Japan deals with its ageing population better than we do and it could also be a leader in terms of a shrinking one. This could be a route forwards for our planet too as fewer humans would place less of a strain on Japan’s limited natural resources. Also it does have a very large national debt but it is mostly domestically owned and would benefit from a national debate of how to deal with it rather than snake-oil efforts. Instead we get ever more financial action pushing for growth accompanied by threats and sanctions based on a green response to the growth.

Meanwhile the chorus is tuning up for “more,more,more” as this illustrates.

“If (currency moves) are having an impact on the economy and prices, and if we consider it necessary to achieve our price target, we’ll consider easing policy,” ( Governor Kuroda yesterday according to Reuters).

Mind you even past supporters of the extraordinary monetary policies are giving up or rather switching to fiscal policy.

Japan must ramp up fiscal spending with debt bank-rolled by the central bank, the Bank of Japan’s former deputy governor Kikuo Iwata said, a controversial proposal that highlights the BOJ’s challenge as it tries to reignite an economy after years of sub-par growth. ( Reuters)

It is not that he would not like to expand monetary policy more but he is unable to look beyond his “precious”

He said there are few tools left to ease monetary policy further as cutting already ultra-low interest rates could push some financial institutions into bankruptcy.

Where these people never get challenged is that they promise success each time but in a burst of collective amnesia their past failures seem to give them credibility rather than demotion. I guess that is what happens when you do what the establishment wants….

Also the financial media that pushed the story of last autumn that the Bank of Japan was reducing equity purchases should be red faced now. For the rest of us we need to be thinking if the Vapors were prescient all those years ago.

I’m turning Japanese
I think I’m turning Japanese
I really think so
Turning Japanese
I think I’m turning Japanese
I really think so

 

 

How much difference has the central planning of the Bank of Japan really made?

Sometimes it is hard not to have a wry smile at market developments and how they play out. For example the way that equity markets have returned to falling again has been blamed on the Italian bond market which has rallied since Friday. But this morning has brought a reminder that even central banks have bad days as we note that the Nikkei 225 equity index in Japan has fallen 2.7% or 609 points today. This means that the Bank of Japan will have been busy as it concentrates its buying of equity Exchange Traded Funds or ETFs on down days and if you don’t buy on a day like this when will you? This means it is all very different from the end of September when the Wall Street Journal reported this.

The Nikkei 225 hit 24286.10, the highest intraday level since November 1991—as Japan’s epic 1980s boom was unraveling and giving way to decades of economic stagnation and flat or falling prices. It closed up 1.4% at 24120.04, a fresh eight-month high. The index has more than doubled since Shinzo Abe became prime minister in late 2012, pushing a program of corporate overhaul, economic revitalization, and super-easy monetary policy.

If you are questioning the “corporate overhaul” and “economic revitalization” well so am I. However missing from the WSJ was the role of the Bank of Japan in this as it has reminded us this morning as its balance sheet shows some 21,795,753,836,000 Yen worth of equity ETF holdings. Actually that is not its full holding as there are others tucked away elsewhere. But even the Japanese owned Financial Times thinks this is a problem for corporate overhaul rather than pursuing it.

According to one brokerage calculation, the BoJ has become a top-10 shareholder in about 70 per cent of shares in the Tokyo Stock Exchange first section. Because it does not vote on those shares, nor insists that ETF fund managers do so on its behalf, proponents of better corporate governance see the scheme as diluting shareholder pressure on companies.

Intriguingly the Financial Times article was about the Bank of Japan doing a stealth taper of these purchases but rather oddly pointed out it had in fact over purchased them.Oh Well!

In early July, for example, analysts noted that over the first 124 trading days of the 245-day trading year, the BoJ had bought ETFs that annualised at a pace of ¥7tn — or ¥1tn ahead of target.

That seems to explain a reduction in purchases quite easily. Anyway, moving back to the Bank of Japan’s obsession with manipulating markets goes on as you can see from this earlier.

BoJ Gov Kuroda: Told Japan Gvt Panel He Will Continue TO Monitor Market Moves – RTRS Citing Gvt Official   ( @LiveSquawk )

It was especially revealing that he was discussing the currency which is not far off where it was a year ago. Mind you I guess that is the problem! It is also true that the Yen tends to strengthen in what are called “risk-off” phases as markets adjust in case Japan repatriates any of its large amount of investments placed abroad.

Putting it another way to could say that the Japanese state has built up a large national debt which could be financed by the large foreign currency investments of its private-sector.

Monetary Base

This has been what the Bank of Japan has been expanding in the Abenomics era and it is best expressed I think with the latest number.

504.580.000.000.000 Yen

Inflation

All the buying above was supposed to create consumer inflation which was supposed to reflate the economy and bring the Abenomics miracle. Except it got rather stuck at the create consumer inflation bit. Just for clarity I do not mean asset price inflation of which both Japanese bonds and equities have seen plenty of and has boosted the same corporate Japan that we keep being told this is not for. But in a broad sweep Japan has in fact seen no consumer inflation. If we look at the annual changes beginning in 2011 we see -0.3%,0%,0.4%,2.7%,0.8%,-0.1% and 0.5% in 2017. For those of you thinking I have got you Shaun about 2014 that was the raising of the Consumption Tax which is an issue for consumers in Japan but was not driven by the monetary policy.

In terms of the international comparisons presented by Japan Statistics it is noticeable how much lower inflation has been over this period than in Korea and China or its peers. In fact the country it looks nearest too is Italy which reminds us that there are more similarities between the two countries economies than you might think with the big difference being Italy’s population growth meaning that the performance per capita or per head is therefore very different to Japan.

Bringing it up to date whilst we observe most countries for better or worse ( mostly worse in my opinion) achieving their inflation target Japan is at 1.2% so still below. Considering how much energy it imports and adding the rise in the oil price we have seen that is quite remarkable, but also an Abenomics failure.

The Bank of Japan loves to torture the data and today has published its latest research on inflation without food, without food and energy, Trimmed mean, weighted median, mode and a diffusion index. These essentially tell us that food prices ebb and flow and that the inflation rate of ~0% is er ~0% however you try to spin it.

Trade

Here Japan looks as though it is doing well. According to research released earlier Japan saw real exports rise by 2.5% in 2016 and by 6.4% in 2017 although more recently there has been a dip. A big driver has been exports to China which rose by 14.1% last year and intriguingly there was a warning about the emerging economies as exports to there had struggled overall and have now turned lower quite sharply.

Comment

As you can see from the numbers above the Bank of Japan has taken central planning to new heights. Even it has to admit that such a policy has side-effects.

Risk-taking in Japan’s financial sector hit a near three-decade high in the April-September, a central bank gauge showed, in a sign years of ultra-easy monetary policy may be overheating some parts of the industry…………The index measuring excess risk-taking showed such financial activity was at its highest level since 1990, when Japan experienced the burst of an asset-inflated bubble.

One of the extraordinary consequences of all this is that in many ways Japanese economic life has continued pretty much as before. The population ages and shrinks and the per head performance is better than the aggregate one. If things go wrong the Japanese via their concept of face simply ignore the issue and carry on as the World Economic Forum has inadvertently shown us today.

What a flooded Japanese airport tells us about rising sea levels

You see Kansai airport in Osaka was supposed to be a triumph of Japan’s ability to build an airport in the sea. To some extent this defied the reality that it is both a typhoon and an earthquake zone. But even worse due to a problem with the surveys the airport began to sink of its own accord, and by much more than expected/hoped. I recall worries that it might be insoluble as giving it a bigger base would add to the weight meaning it would then sink faster! Also some were calculating how much each Jumbo Jet landing would make it sink further. So in some respects it is good news that they have fudged their way such that it still exists at all.

Here is another feature of Japanese life from a foreign or gaijin journalist writing in The Japan Times.

If you’re a conspicuous non-Japanese living here who rides the trains or buses, or goes to cafes or anywhere in public where Japanese people have the choice of sitting beside you or sitting elsewhere, then you’ve likely experienced the empty-seat phenomenon with varying frequency and intensity.

Just as a reminder Japanese public travel is very crowded and commutes of more than 2 hours are more frequent than you might think. How often has someone sat next to him?

It’s such a rare occurrence (as in this is the second, maybe third time in 15 years) that my mind started trying to solve the puzzle.

 

 

 

 

 

 

Has Abenomics in Japan found what it is looking for?

This morning has brought news from Nihon the land of the rising sun and no I do not mean that the summer has been especially hot this year peaking at above 40 degrees centigrade around Tokyo. I mean this from The Japan Times.

Separate data showed workers’ real wages rose 2.8 percent in June from a year earlier, accelerating from a 1.3 percent increase in May and marking the fastest pace of growth since January 1997.

We have been noting a change in the pattern and waiting for developments and the June numbers are good but come with a kicker. What I mean by this is that it is the month where around two thirds of the summer bonuses are paid so it is good for workers as the 2.8% is of a larger than normal amount as pay is 41% above average in the month. But the kicker is that the boost is mostly bonuses and therefore will fade.

Looking into the detail we see that nominal wage growth was 3.6% and was pulled higher by the manufacturing sector where the summer bonuses saw wage growth rise to 4.2%. It must have been party time in the wholesale and distribution sector as total wage growth rose at an annual rate of 10.7%. So there was an excellent bonus season as 3.6% growth replaced the 0.4% of this time last year.

What about base or regular pay?

This was by no means as good as contracted earnings rose at an annual rate of 1.5% and scheduled earnings at 1.3%. However these are better numbers than seen in 2017 or indeed in the Abenomics era. Just to give you the picture starting in 2014 annual growth has gone -0.1%, 0.2%,0.2% and 0.4% last year. When you consider that one of the Abenomics “arrows” was supposed to be higher wages that was quite a failure when you consider all the monetary easing.

Now the picture looks a little better as real wage rises have replaced falls albeit that they are small such that pressure is put on the accuracy of the data. They probably cannot take it but they are what we have.

Full employment

I get regularly asked what this concept is and if it is seen anywhere in practice Japan seems to be it. For example whilst the unemployment rate nudged higher to 2.4% in June it is extraordinarily low. The job applicant to vacancy ratio has been setting new highs at 2.47 according to Japan Macro Advisers. Thus economic theory would predict that wages would have been rising and frankly surging, after all the Bank of Japan estimated that the structural rate of unemployment was 3.5% as another Ivory Tower foundation bites the dust.

The blame game

At the end of last month the Bank of Japan published some new research on this issue. First we get something of a criticism of what is called Japan Inc.

Basically, the reason for this is that, under Japan’s
labor market structure, which is characterized by
different wage-setting mechanisms for regular and
non-regular employees, the increase in wages of
regular employees has been remarkably
sluggish.

This is pretty standard analysis world-wide of course except the degree of tightness of the labour market is exceptional in Japan. But the theme of employers being willing to do almost anything other than raising basic pay we have seen pretty much all over the world. However the next bit of research has more than a few implications.

With labor shortage intensifying recently, the pace
of increase in the labor force participation rate,
especially among women and seniors, is
accelerating.

Encouraging women to work has been a government objective and you can see the rise in older people working in two ways. One as a sign of good health in that they can but the second is not so positive as I have noted before some are forced to work because times are hard. A while back I noted the issue of retired women in Japan sometimes being very poor which is against its culture. Well if you throw all of these factors into the pot look what the Bank of Japan thinks you get.

In other words, among these groups,
there will be greater labor supply for the same rate
of increase in wages . As a result, as
labor demand increases (represented by a shift of
the labor demand curve to the right in the chart),
women and seniors will supply more labor, which
in turn suppresses wage increases.

So this has been a boost for Japan Inc which has increased its labour supply cheaply but not good for existing workers.

If the labor supply of women and seniors were not elastic,
wage increases likely would have been larger.

So it was them that done it if we look at it in tabloid terms but where the Bank of Japan does not go I will. You see if we go back to the critiques of the likely behaviour of Prime Minister Abe before he was elected there was the case that he would favour Japanese businesses and Japan Inc. Just like he had in his first term. Well is there anything they would like more than a cheap labour supply? Especially in a country which due to a shrinking population has a clear issue with labour supply.

Next comes the impact of a supply of cheap labour. This makes me think of the UK where the Ivory Towers tell us again and again that the increase in labour supply from net immigration did not affect wage growth. Now there are various factors to put in this particular melting pot but this research from the Bank of Japan is clearly heading in the opposite direction.

Productivity

Here is something you may not expect but I mention it from time to time so let me hand over to the Bank of Japan and the emphasis is mine.

One reason is that the productivity of
Japanese firms is relatively low and there is large
room to raise productivity, mainly in the
nonmanufacturing sector. In fact, Japan’s labor productivity remains at only 60 to 70 percent of the U.S. level.

Japan has been doing well in terms of growth recently but there are two issues. Firstly even 1.2% per annum is not great and secondly it has been forced on it as it looks to a future of labour shortages.

Comment

There is a fair bit to consider here. The rise in wages in June is welcome and the Yen in the workers pocket does not know whether it is a result of regular or bonus pay. But for now it looks like some icing on a similar cake. Combining this with the news on inflation that I discussed last time means that one area of Abenomics failure will in fact  be a positive here.

Another factor is that households are reluctant to
accept rises in housing rent and administered
prices given the low actual inflation rate and
inflation expectations ( Bank of Japan)

If we throw in imputed rent as well that is half the inflation measure. The Japanese do not know have lucky they are to have this and for all the Turning Japanese themes the Bank of Japan wants them to turn British in this respect. But if we move on from the detail we see that low inflation means this looks like a better year for real wages. Accordingly if we look back to my last update on this issue from a fortnight or so ago this from Gavyn Davies in the Financial Times looks even worse than it did then.

Even with very careful communication and forward guidance, monetary policy may not be sufficient, on its own, to reach the inflation target. Eventually, unconventional fiscal easing may also be needed, though this is not remotely on the horizon at present.

As ever the picture remains complex as so far the wages growth has yet to filter through.

Household spending fell 1.2 percent in June from a year earlier, government data showed on Tuesday, marking the fifth straight month of declines.

 

 

 

Wages finally rise in Japan but are such small rises the future for us too?

This morning has brought news from the land of the rising sun or Nihon. Actually it is news that much of the media has been churning out over the Abenomics era when they have tried to report wage growth when there has not been any. However today the Ministry of Labor published some better news of the real variety.

Nominal cash earnings rose 2.1 percent year-on-year in March, the fastest annual gain since June 2003. It followed a revised 1.0 percent gain in February.

Regular pay, which accounts for the bulk of monthly wages, grew 1.3 percent in the year to March, the biggest gain since July 1997, while special payments jumped 12.8 percent as many firms offered their employees end-of-the-year bonuses.

Overtime pay, a barometer of strength in corporate activity, rose an annual 1.8 percent in March versus a revised 0.4 percent increase in February. (Reuters)

As you can see these numbers are something of a landmark in the lost decade era as we note the best overall earnings numbers since 2003 and the best regular pay data since 1997. Overtime pay was up too which is intriguing as the Japanese economy has not had the best start to 2018 and may even have shrunk in the first quarter ending a run of growth. Maybe this year Japanese employers are actually fulfilling their regular promises to raise wage growth.

Care is needed in that this is only one monthly number but after some revisions we see that 2018 so far has recorded annual wage growth of 1.2%,1% and 2.1%. These are low numbers but in the context are a shift higher. This can be explained if we look at the index for such numbers which is still only 101.9 after being set at 100 in 2015. We get an idea as it was 100 in 2014 as well and 100.6 in 2016 and 101 in 2017. Also we need to be aware that the main months for pay in Japan come in June/July and particularly December as for example pay in December is around double that for March but for now let us move on with a flicker of spring sunshine.

Is this the revenge of the Phillips Curve?

No doubt it is party time at the Ivory Towers although many may not have spotted this yet as of course news reaches them slowly. However I am still something of a “party pooper” on this subject as it still does not really work. Here is a tweet from a discussion I was involved in yesterday.

As you can see the state of play is very different between the American situation which we have looked at many times and the Japanese one. Female participation in the labour force changed with the onset of the lost decade era and male participation has picked up in the era of Abenomics although it had started around the beginning of the credit crunch.

If we look at the Abenomics impact I will let you decide if a major swing is good or bad. You see in the age group 55-64 the female participation rate is up by 10.2% in the past 6 years and the male one by 6.6%. I have written in the past that Japan looks after it older citizens well but there have been more and more suggestions that this is if not forced due to difficult circumstances. From the Independent on the 23rd of April.

For decades prior to this trend, it was a tradition for families and communities to care for their older citizens, but a lack of resources is making that harder to do so.

With the older population feeling more and more isolated as a result of this, women especially have turned to a life of crime in the hope that prison will provide them with a refuge and a home.

Returning to conventional economics there is also this to consider.

The number of unemployed persons in March 2018 was 1.73 million, a decrease of 150 thousand or 8.0% from the previous year.   The unemployment rate, seasonally adjusted, was 2.5%. ( Japan Statistics Bureau).

These are extraordinary numbers as it was 3.9% in 2007 so it has been singing along with Alicia Keys.

Oh baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fall

We cannot rule out the possibility it will fall even further as it was 2.4% in January. Also it is being combined with rising employment.

The number of employed persons in March 2018 was 66.20 million, an increase of 1.87 million or 2.9% from the previous year.

Inflation

I though I would add this into the mix as it provides something of an irony. The view of the Bank of Japan has been for so long that an annual inflation rate of 2% is just around the corner. Yet in its last report it lost the faith.

In terms of the outlook for prices, most members shared the view that the year-on-year rate of change in the CPI was likely to continue on an uptrend and increase
toward 2 percent, mainly on the back of the improvement in the output gap and the rise in medium- to long-term inflation expectations.

And later this.

the momentum of
inflation was not yet strong enough to achieve the price stability target of 2 percent at an
early stage.

Of course now with an oil price of US $77 for a barrel of Brent Crude they may see an inflationary push bringing them nearer to their objective. Of course they think inflation at 2% per annum is a good thing whereas I do not. After all even the recent better wage data would leave real wages flat in such a scenario.

We will have to see if oil prices remain here but for now the news just coming through that Saudi Arabia has intercepted two ballistic missiles seems set to support it.

Comment

Let me start with some good news for Japan which is that on what used to be called the Misery Index it is doing very well. It used to add the unemployment rate ( 2.5%) to the inflation rate ( 1%) and as you can see it is rather low. Very different to the double-digit numbers from the UK when it was a popular measure.

But for economic theory and for the Phillips Curve in particular this is much less satisfactory.  This comes partly from asking where has it been? Let me hand you over to the Bank of Japan.

(1) the actual unemployment rate had been substantially below 3.5 percent, which had formerly been regarded as the structural unemployment rate,

So wage growth should have been surging for ages and it has not. Now we face a situation which may be more like a cliff-edge that the smooth Phillips Curve. This is because on every measure Japan has been approaching full employment and in the mad world of economics 101 has in fact passed it.

(2) the recruitment rate of new graduates and the employment rate of women had risen
considerably.

In fact if you look at the demographic situation full employment seems set to be lower than it was due to the aging population as so far rising participation has offset it. But here is the rub if participation had not changed then unemployment would be below 2% now as we are left wondering what level would generate some real wages growth?

Meanwhile if we look back at the US participation data there were some chilling responses as to the cause. They looked at something which has troubled us before on here.

https://www.bbc.co.uk/programmes/b09yfqsy#play

 

However much the Tokyo Whale buys wages and consumption seem to struggle

On Wednesday evening the US Federal Reserve will announce its latest policy decision and it will be a surprise if it does not give US interest-rates another 0.25% nudge higher. Yet we see in an example of clear policy divergence other countries ploughing on with monetary easing. For example the European Central Bank continues with monthly QE of 30 billion Euros a month and still has a deposit rate of -0.4%. However the leader of this particular pack is the Bank of Japan especially if we look at other signals of what are known as side-effects. From Bloomberg last week.

That’s the backdrop to Tuesday’s session, when not a single benchmark 10-year note was traded on exchange, according to Japan Trading C0. data. Barclays Securities Japan rates strategist Naoya Oshikubo, summed it up, with perhaps an understatement: “the JGB market was generally thin.”

The latter part is simply part of the Japanese concept of face. One reason for this is the size of the holdings of the Bank of Japan.

The Bank of Japan has vacuumed up so much of the government bond market — in excess of 40 percent — that it’s left fewer securities for others to buy and sell. Some other buyers, such as pension funds and life insurers, also tend to follow buy-and-hold strategies.

The latter sentence there is weak as pension funds and life insurers enact such strategies all over the world and have done so for decades so it is hardly their fault. Indeed quite the reverse s many national bond markets have relied on such purchases.

Whilst we keep being told the Bank of Japan is cutting back the amount of buying remains enormous.

Governor Haruhiko Kuroda noted to lawmakers Wednesday that the central bank has bought 75 percent of the government bonds issued in the fiscal year ending this month.

The next bit contradicts itself as it seems to be claiming that if you buy everything you do not need to intervene. Oops!

The upside for the BOJ is that with such little going on in the market, it makes it easier to control the yield curve, with less need for intervention

The Bank of Japan is the yield curve it would seem which is we step back for a moment begs all sorts of questions. For example you might compare currencies as I have certainly done in the past by comparing bond yields yet in such a calculation there is the implicit assumption that you have a “market” rate. But no, we clearly do not in Japan and that is before we get to the moral hazard of it being set by a body trying to depreciate/devalue the Yen. Oh and if you are a Japanese bond trader you might want to send your CV to the Bank of Japan.

Some jobs might be threatened by automation. But when it comes to government bond trading in Japan, the biggest threat might be the country’s central bank.

The Tokyo Whale

This for newer readers refers to the way that the Bank of Japan has piled into the equity market as well. The numbers are opaque as they are in several accounts but Bloomberg has been doing some number-crunching.

The BOJ started buying ETFs in 2010, with Governor Haruhiko Kuroda later accelerating purchases as part of an unprecedented stimulus package aimed at revitalizing the economy. The central bank had spent $150 billion on Japanese ETFs as of Dec. 8. It owned 74 percent of the market at the end of October, up from 65 percent a year earlier, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg. ( ETFs are Exchange Traded Funds)

As the Nikkei-225 equity index fell by 195 points today we know that the Tokyo Whale would have been buying again.

The BOJ stepped up purchases in November after equities retreated, buying 598 billion yen of ETFs.

With there being a buy the dip strategy we can be sure that the Bank of Japan has been buying this year as there have been dips. If we were not sure then this morning’s release of “opinions” from the latest policy meeting reinforce the message.

If the current trends of the appreciation of the yen and the decline in stock prices become prolonged, business fixed investment and consumption will be restrained due to negative wealth effects and a deterioration of households’ and firms’ balance sheets,

Just for clarity the BOJ is breaking new ground here is it really believes that. Not by arguing for “wealth effects” as central bankers the world over are true believers in them. What I mean is the implication that they are larger than other factors at play whereas the evidence I have seen over time is that they are minor and thus often hard to find at all. Looking deeper we see that the BOJ seems to have little intention of changing course although a boundary is on the horizon as some holders must want to keep their ETFs meaning it cannot be long before it has to look for greener pastures.

Perhaps this are suggested last November, from Reuters.

The Bank of Japan should consider using derivatives, rather than buying Japanese stock funds directly as it does now, to affect risk premium on stocks, because that would be a better tool, said the chief investment officer of Japan Post Bank………By selling put options of Japanese stocks, the BOJ should be able to not only help bring down the stock market’s volatility but also to make it easier to wean the markets off its stimulus, said Katsunori Sago, a former Goldman Sachs (GS.N) executive.

Alumni of the Vampire Squid get everywhere don’t they? So the fact that the Bank of Japan’s policies have in effect been a put option for Japanese equities should be added to by writing actual put options. Who would be silly enough to buy these options from the Bank of Japan? It is hard to know where to begin with the moral hazard here.

If the BOJ sells out-of-the-money puts, for example, put option with strike price below the current market levels, it can reduce the market’s volatility, Sago said.

Er simply no. You can reduce perceived or implied volatility but should the market move there is actual volatility. Unless of course Sago san is suggesting that the Bank of Japan should intervene in equity markets on the same scale as it has in bond markets and I think there we have it. Whilst there would presumably be profits for equity holders as much of the Japanese markets are Japanese owned we are in many cases simply shifting from one balance sheet to another.

Yen

This is something that fits the famous Churchillian phrase.

 It is a riddlewrapped in a mystery, inside an enigma;

Why? Well it is something which all the buying above should according to economics 101 be on its way down and yet there it is at 106 to the US Dollar. You can argue the US Dollar has been weak but I note that the UK Pound £ has been pushed back to 148 Yen as well. We get a clue from this from the Nikkei Asian Review.

Foreign assets held by Japanese institutional and individual investors appear to have topped 1,000 trillion yen ($8.79 trillion) for the first time, according to Nikkei estimates. The amount has increased roughly 50% during the past five years and now is more than twice as much as the country’s gross domestic product.

The market has been responding to fears of a repatriation much more than any new flows. Also as the BOJ has to some extent driven investors overseas it has undermined its own weak Yen policy. We are back to timing effects where something may be true but for a limited time period, Keynes understood it but modern central bankers lack such humility.

Comment

We have looked at the financial economy today but lets us via the “opinions” of the Bank of Japan switch to the real economy.

For instance, although the structural unemployment rate was formerly said to be around 3.5 percent, the actual
unemployment rate has continued to decline and registered 2.4 percent recently.

I imagine each Board Member sipping from their celebratory glass of sake as they type that. But there is a problem as we see below.

Although wage increases by firms have been at around 2 percent for the past few years, real wages registered negative growth in 2017 on a year-on-year basis.

That claim about wage rises is news to me and also the ministry of labor but let us pass that as we note the fall in real wages admitted as we reach the nexus of all of this.

The weak recovery in household consumption since last summer is of concern.

You see one way of looking at the Japanese economy is of deficient domestic demand. So when we are in an official world of wealth effects, plunging unemployment and surging wages ( 2% is a surge in Japanese terms or at least it would be) it should be on the up whereas with a little poetic licence it seems still to be rather Japanese.