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.

 

 

 

 

 

 

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Will real wage growth ever go back to “normal”?

A constant theme of the credit crunch era is the unwillingness of the establishment to accept that past economic theories need to be put as a minimum on the back burner. Two examples of that are the concepts of full employment and the related one of the output gap. If we start with the former that does not mean that everyone is employed as the “man from Mars” from Blondie’s song rapture might think. It involves allowing for what is not entirely pleasantly called frictional unemployment, for example of individuals temporarily between jobs. There is an obvious problem with measuring that but as we discover so often the Ivory Towers are seldom troubled by issues like that.

The output gap was something of a simple concept around comparing actual output with potential. However supporters were invariably in the group who argued there was a large amount of lost output from the credit crunch and this end gamed themselves as we are still well below that and may always be. The Bank of England Ivory Tower dropped that and instead kept telling us we had an output gap of circa 1.25% of GDP. In the end they decided to drop as it was always 1.25% or so and switched to employment as a measure. Why? Well in the UK like more than a few other places it boomed so they could shoehorn their theory into a different version of reality. Sadly for them they have made fools of themselves as their estimates began at 7% unemployment went very quickly to 6,5% and are now at 4.25%. Or if you prefer silly,sillier and so far at least silliest.

Reality

The problem for all of the above has been shown in Nihon or the land of the rising sun. There the unemployment rate has fallen as low as 2.2% this year and in August was 2.4% How can it be half the natural/full rate? Please address that question to Threadneedle Street. Whilst there are suspicions about the accuracy of unemployment rates there are also other signals of what in the past would have been called an overheating jobs market. From the Japan Times last week.

The percentage of working-age women with jobs in Japan reached a record high of 70 percent in August, government data showed Friday………The figure for women in work between ages 15 and 64 is at the highest level since comparable data became available in 1968 and compares with 83.9 percent for working-age men,

Other measures such as the job offers to applicant ratio going comfortably above 2 signal a very strong labour market and yet this morning we have seen this. From Reuters.

 Japanese workers’ inflation-adjusted real wages fell in August for the first time in four months……..The 0.6 percent decline in real wages in August from a year earlier followed a revised 0.5 percent annual increase in July, labor ministry data showed on Friday.

This is a rather awkward reality for those who have trumpeted a change in Japan in line with the two economic theories described above, and I note a lack of mentions on social media. If we look into the detail we see this.

Nominal cash earnings rose 0.9 percent year-on-year in August, slower than a revised 1.6 percent annual increase in July.

The average level of monthly earnings is 276,266 Yen or a bit under £1900. The highest paid industry was the utility sector at 438,025 Yen and the worst-paid was the hotel and restaurant sector at 123,405 Yen. The fall can be looked at  from two perspectives of which the first is a fall in bonuses of 7.4% and the next is that the numbers were pulled down by falls in the care sector (3.8%) and education (3.6%).

As to the surge ( real wages rose at an annual rate of 2.5% in June) it was as we believed.

Major Japanese firms typically pay bonuses twice a year, once during the summer and once near year’s end…….Summer bonuses boosted real wages in June.

This morning has also brought a confirmation of why this is good.

Japanese households increased their spending at the fastest rate in three years in August as consumers made more costly purchases, government data showed Friday.

Spending by households with two or more people rose 2.8 percent from a year earlier, after adjusting for inflation, to ¥292,481, the largest increase since August 2015, the Internal Affairs and Communications Ministry said. ( Japan Times)

But that will now rend to fade away after the welcome bonuses are spent. Sadly the output gap style theories are unlikely to fade away as reality is always “Tis but a scratch” along the lines of the Black Knight in Monty Python.

The UK

In the UK we keep being told that wage growth is just around the corner. From the REC this morning.

Starting salaries for people placed into permanent
jobs increased at the quickest pace since April 2015
during September. Hourly rates of pay for temp staff
also rose at a faster pace than in the preceding
month.

The strongest area was this.

IT & Computing remained the most in-demand
category for permanent staff in September.

Perhaps it is the banks finally waking up to the all the online outages and problems. But the problem is that a sustained rise keeps being just around the corner. In its desperation to justify its theories the Bank of England switched to private-sector regular pay in its attempt to find any reality fitting the work of its Ivory Tower. But if you pick a sub-section it has to eventually fire up the overall numbers to be significant and the picture there is that total wage growth has surged from 2.8% in January to 2.6% in July. Oh hang on…..

Or real wage growth is somewhere around 0% on the official inflation measures or negative on the “discredited” RPI which gives a higher reading.

The US

Today brings the labour market data for September but until then we are left with this.

In August, average hourly earnings for all employees on private nonfarm payrolls rose by 10 cents to $27.16. Over the year, average hourly earnings have increased by 77
cents, or 2.9 percent.

August was a good month but if we switch to the annual rate but we see that even in an economy that according to the GDP nowcasts is keeping up its 4% per annum growth rate wages are struggling to break 3%. The US economy has recovered better than most and is doing well now and yet wage growth has not followed much. Real wage growth is as you can see minimal.

Over the last 12 months, the all items
index rose 2.7 percent before seasonal adjustment.

According to the Financial Post it is a case of O Canada as well.

Over the three years he’s been in power, real wages have averaged annual gains of just 0.3 per cent, versus 1 per cent the previous decade.

Comment

A feature of the credit crunch era continues to be the attempt to ignore the more uncomfortable aspects of reality. There is welcome news in the way that employment levels recovered but the price of that seems to have been weak wage growth and especially real wage growth. This afternoon that number from the US Bureau of Labor Statistics will be poured over again for that reason. The big picture though comes from David Bowie.

Ch-ch-ch-ch-changes
Turn and face the strange
Ch-ch-changes
Where’s your shame?
You’ve left us up to our necks in it

 

We have a serious problem with real wages

One of the features of the early days of this website was the fact that there were regular replies/comments suggesting that wages and earnings would continue to be a problem for some time. I doff my cap to those who first suggested it as it has become a theme of the credit crunch era. This means that your unofficial Forward Guidance was vastly more accurate and useful than those paid to do it. Here is an example from back then (Summer 2010) from the grandly named Office for Budget Responsibility or OBR.

Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.

That to borrow from Star Wars seems like something from “A long time ago in a galaxy far, far away….”. It is even worse if we look at the situation in terms of real wages as the OBR forecast that it would be on target, so we see that real wage growth would be 3% per annum. Happy days indeed! But it was just an illusion.

The scale of that illusion was illustrated by this from Geoff Tily of the Trade Union Congress or TUC earlier this week.

So in the decade before the first TUC meeting in 1868, real wages had fallen by 0.1%. Since then, only the decade to 2018 has seen a worse performance, with real wages down by a whopping 4.4%.

So rather than the sunlit uplands suggested by the OBR we have seen a much more grim reality. As an aside this brings us back to the problem of “experts”. In my opinion you deserve that label if you get things right, for example aircraft designers as air travel is very safe. Whereas official economics bodies are regularly wrong and therefore in spite of the lauding they get from the media do not deserve such a label. I also note that those who debate that issue with me and claim that it does not matter the forecasts are wrong (!) are often from the group that have hopes of gaining employment in this area.

Discovering Japan

This morning has brought more news on wage growth in Japan but before we get to it we need to set the scene. This is because the land of the rising sun has been anything but in terms of wage growth. Or as Japan Macro Advisers put it.

Wages in Japan has been steadily falling in Japan since 1998. Between 1997 and 2012, wages have declined by 12.5%, or by 0.9% per year on average.

Japan has been the leader of the pack in a race nobody wants to win. It also provided a warning which has come in two guises. Firstly the concept of real wages falling in a first world industrialised country and secondly the very long period for which this has been sustained. This is one of the major players in the concept of the lost decade for Japan which in this regard has now lasted for two of them.

This was a driver between the original claims for Abenomics where ending the deflationary mindset was supposed involve higher wage growth. In reality the performance is shown by the official real wage index which was set at 100 in 2015 and was 100.5 last year. So very little growth and in fact a reduction on the 101 of 2014. But hope springs eternal and we know that May and especially June were much better so here is Reuters on this morning’s release of the July data.

Separate data showed Japanese workers’ inflation-adjusted real wages rose 0.4 percent in July from a year earlier, marking a third consecutive month of gains.

What this tells us is that as the bonus season is passing the better phase was for bonuses and nor regular wages or salaries. So whilst the news is welcome it is not the new dawn that some have tried to present it as. Indeed tucked away in the Reuters report is a major issue in this area.

 firms remain wary of raising wages, despite reaping record profits.

The link between companies doing well and wages rising in response has been broken for a while now. Earlier this week Japan Press Weekly was on the case.

Finance Ministry statistics released on September 3 show that in 2017, large corporations with more than one billion yen in capital increased their internal reserves by 22.4 trillion yen to a record 425.8 trillion yen.

Compared with the previous year, big businesses’ current profit was inflated by 4.8 trillion yen to 57.6 trillion yen, 2.3 times larger than that in 2012 when Prime Minister Abe made his comeback. The remuneration for each board member was 19.3 million yen a year, up 600,000 yen from a year earlier. Meanwhile, workers’ annual income stood at 5.75 million yen on average, down 54,000 yen from the previous year.

The section about the rise in profits for big businesses under Abenomics resonates because the critique of his first term was exactly that. He benefited Japan Inc and big business.

The United States

Later today we get the non farm payrolls release from the US telling us more about wage growth. But as we stand in spite of the fact the US economy has had a good 2018 so far the state of play is a familiar one.

Real average hourly earnings decreased 0.2 percent, seasonally adjusted, from July 2017 to July 2018.
Combining the change in real average hourly earnings with the 0.3-percent increase in the average
workweek resulted in a 0.1-percent increase in real average weekly earnings over this period.

Indeed if we look back as Pew Research has done we see that real wage growth has been absent for some time.

A similar measure – the “usual weekly earnings” of employed, full-time wage and salary workers – tells much the same story, albeit over a shorter time period. In seasonally adjusted current dollars, median usual weekly earnings rose from $232 in the first quarter of 1979 (when the data series began) to $879 in the second quarter of this year, which might sound like a lot. But in real, inflation-adjusted terms, the median has barely budged over that period: That $232 in 1979 had the same purchasing power as $840 in today’s dollars.

There have been gains in benefits but not wages over these times.

The Euro area

The Czech National Bank has looked at this and we see an ever more familiar drumbeat.

 In the euro area, nominal wage growth was 1.7% in 2017 Q4, while real wages were broadly flat.

This comes with factors you might expect ( Italy) but also I note Spain which is doing well.

In Italy, by contrast, hourly wages dropped both in nominal terms and in real terms (i.e. adjusted for consumer price inflation). Spain and Austria also recorded wage decreases in real terms.

Also they are not particularly optimistic looking forwards.

However, the wage growth outlooks available for the euro area and especially for Germany do not see wages accelerating significantly any time soon.

We could apply that much wider.

Comment

The message today was explained by Bob Dylan many years ago.

There’s a battle outside
And it is ragin’
It’ll soon shake your windows
And rattle your walls
For the times they are a-changin’

The truth is that the economics profession has been slow to realise that not only would the credit crunch reduce wage growth, but that it was already troubled. Only last night in a reply to a comment I referred to Deputy Governor Wilkins of the Bank of Canada spinning the same old song.

Yet, wages were rising less quickly than we would expect in an economy that is near capacity.

The same old “output gap” mantra when in fact the reality is of inflation at 3% and wages growth at 2.5%.

To be fair some places do seem to be adjusting as the Czech National Bank faces up to an issue that the UK economics establishment continually assures us is not true.

Migration from Eastern Europe, Italy and Spain,3 which has increased mainly because of the financial and debt crisis, is playing a major role. Workers from these countries are increasing the labour supply and perhaps exerting less upward pressure on wages than incumbents. ( They are referring to German wage growth).

Some however seem to inhabit an entirely different universe as this op-ed from November last year in The Japan Times shows.

Thinning labor puts upward pressure on wages, increasing living standards……

 

Let me leave you with an optimistic thought. As I watched the AI documentaries on BBC Four this week I wondered if rather than fearing it we should have hopes for it. Maybe the rise of the machines will be fairer than our current overlords.

 

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.

 

 

 

Japan is the land with no inflation

The concept of the “lost decade” in Japan which of course now encompasses at least two of them has many features but one of them is the lack of inflation. This has continued in spite of the enormous effort to create some driven by the Abenomics economic policy of the current government and the Bank of Japan. Or as James Mackintosh put it yesterday.

Japanese consumer prices are now at the same level as in October 1998. Not inflation, but the *level* of CPI.

So not quite two lost decades although care is needed because as regular readers will be aware my view is that the inflation obsession of the world’s central banks is misguided. After all the 2% annual target was something that seemed right rather than being a considered thought out plan.

If we move to more recent developments we see a familiar tale of not much going on as the annual inflation rate was 0.7% in June. The index based at 2015 levels is at 100.9. Even in an area where you would expect inflation which is medical services ( for an aging population) there is not much as it is 2% and 103.3 respectively. This is a world where the 100 Yen machine still exists and you get the same drink or chocolate bar you got years ago. The feature that sticks in my mind from when I worked in Tokyo was the gloriously named “Pocari Sweat” which tasted better than in sounds. Another feature that is different to the UK in particular is the housing sector where there is little or no inflation either as it registers a 0.1% fall in the last year and the index is at 99.6. That’s where it was in 1996!

The Bank of Japan

There have been developments here this week as it once again faces the prospect of failing with regards to it inflation target. This is analagous to Mario Draghi calling for reform in the Euro area which is also in every policy statement. This morning saw the release of its latest research into underlying inflation which of course central bankers love when the headline isn’t behaving. But if anything it makes things worse as we plough through the trimmed mean, the weighted median and the mode. If I was Governor I would be rather pleased to see the weighted median at 0% but Governor Kuroda of course is not.

Here is yesterday’s response described by NHK News.

The Bank of Japan has made a move to curb the recent rise in long-term interest rates.

BOJ officials said on Monday that they are offering to buy an unlimited amount of Japanese government bonds at a fixed rate.

There is a bit of hype in the use of “unlimited amount” as whilst Japan issues plenty of bonds the Tokyo Whale has gobbled quite a few up already. Also the yield movements are very Japanese.

On Monday morning, the yield on the benchmark 10-year government bond briefly hit 0.090 percent on speculation the central bank may review its bond-buying program at next week’s meeting. The BOJ’s target for the yield is around zero percent.

After the officials made the suggestion, the yield fell to 0.065 percent.

Firstly let us note the small difference here before we look at the  Reuters perspective

The country’s government bond yields rose sharply on Monday, the first chance Asian traders had to react to a Reuters report that the central bank was debating whether to scale back monetary stimulus………Yields on the benchmark 10-year Japanese government bonds, or JGBs, shot up nearly six basis points on Monday before the central bank offered to buy unlimited amounts at a yield of 0.11 percent.

So returning to the yield issue it is not much but is better in real terms than in many places especially if you take a broad sweep of Japanese inflation. You may also note that the Bank of Japan more threatened to buy rather than actually buying. This is the new yield curve control programme which has seen its purchases slow. The hint it might step back has the problem that for so long it has pretty much centrally planned the Japanese Government Bond market which otherwise has withered on the vine.

 

The economy

There have been problems here too as we remind ourselves of what happened in the first quarter.

The economy shrank by an annual rate of 0.6 percent in the first quarter of 2018 as consumers kept their purse strings tight despite signs that paychecks are finally beginning to rise after decades of flat wages. ( Japan Times).

This morning’s PMI business survey for manufacturing has done little to improve the mood.

Japan Flash Manufacturing PMI falls to 20-month
low of 51.6 in July, from 53.0 in June…….New business grew at a much weaker rate and was broadly flat,
while export demand, despite further yen depreciation,
deteriorated for a second month running ( Markit ).

Actually these developments bring things more into line with the Bank of Japan in the sense that it felt the Japanese economy had outperformed in the previous 2 years.

However the labour market remains strong.

The unemployment rate fell to the lowest level in more than 25 years in May as companies ramped up hiring amid solidifying economic conditions, government data showed Friday……..The rate fell to 2.2 percent, against an estimated 2.5 percent, the lowest since 1992, the Internal Affairs and Communications Ministry said. Separate data released the same day by the labor ministry showed the job-to-applicant ratio was 1.6, the highest since 1974.

There was also a flicker from wage growth in May as bonuses boosted the numbers meaning that real wages were 1.3% higher than a year before. It has led t the usual flurry of excitement from the media desperate to justify all their past pro Abenomics headlines who presumably follow the advice of “look away now” at the previous months as 3 out of 4 showed negative annual growth. Still for fans of “output gap” style analysis it is an improvement from complete disaster to mere failure assuming it lasts. They would be expecting the equivalent of the 41 degrees celsius recorded near to Tokyo yesterday.

Comment

Actually the twenty years of being an inflation free zone has not gone that badly for Japan. Collectively the economic growth rate has been weak but individually it has done better as we see a positive spin on the falling population level. Personally I think that pumping up inflation to 2% per annum would be likely to inflict economic danger on Japan because if we look across to the west we see that the Ivory Tower assumption that wages would automatically rise in response is another error.

But as so often the cry for “More! More! More!” goes up as I note this from Gavyn Davies in the Financial Times.

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.

So the monetary policy which apparently could not fail has so lets pump up fiscal policy. That starts from an interesting level of the national debt and from a curious view of where inflation has been.

Bank of Japan faces the return of very low inflation

How can you return if you never went away?

Trade Wars what are they good for?

This week trade is in the news mostly because of the Donald and his policy of America First. This has involved looking to take jobs back to America which is interesting when apparently the jobs situation is so good.

Our economy is perhaps BETTER than it has ever been. Companies doing really well, and moving back to America, and jobs numbers are the best in 44 years. ( @realDonaldTrump )

This has involved various threats over trade such as the NAFTA agreement primarily with Canada and Mexico and of course who can think of Mexico without mulling the plan to put a bit more than another brick in the wall? Back in March there was the Trans Pacific Partnership or TPP. From Politico.

While President Donald Trump announced steel and aluminum tariffs Thursday, officials from several of the United States’ closest allies were 5,000 miles away in Santiago, Chile, signing a major free-trade deal that the U.S. had negotiated — and then walked away from.

The steel and aluminium tariffs were an attempt to deal with China a subject to which President Trump has returned only recently. From the Financial Times.

Equities sold off and havens firmed on Tuesday after Donald Trump ordered officials to draft plans for tariffs on a further $200bn in Chinese imports should Beijing not abandon plans to retaliate against $50bn in US duties on imports announced last week.

According to the Peterson Institute there has been a shift in the composition of the original US tariff plan for China.

 Overall, 95 percent of the products are intermediate inputs or capital equipment. Relative to the initial list proposed by the Office of the US Trade Representative on April 3, 2018, coverage of intermediate inputs has been expanded considerably ……….Top added products are semiconductors ($3.6 billion) and plastics ($2.2 billion), as well as other intermediate inputs and capital equipment. Semiconductors are found in consumer products used in everyday life such as televisions, personal computers, smartphones, and automobiles.

The reason this is significant is that the world has moved on from even the “just in time” manufacturing model with so many parts be in sourced abroad even in what you might think are domestic products. This means that supply chains are often complex and what seems minor can turn out to be a big deal. After all what use are brakes without brake pads?

Thinking ahead

Whilst currently China is in the sights of President Trump this mornings news from the ECB seems likely to eventually get his attention.

In April 2018 the euro area current account recorded a surplus of €28.4 billion.

Which means this.

The 12-month cumulated current account for the period ending in April 2018 recorded a surplus of €413.7 billion (3.7% of euro area GDP), compared with €361.3 billion (3.3% of euro area GDP) in the 12 months to April 2017.

 

 

So the Euro area has a big current account surplus and it is growing.

This development was due to increases in the surpluses for services (from €46.1 billion to €106.1 billion) and goods (from €347.2 billion to €353.9 billion

There is plenty for the Donald to get his teeth into there and let’s face it the main player here is Germany with its trade surpluses.

Trade what is it good for?

International trade brings a variety of gains. At the simplest level it is access to goods and resources that are unavailable in a particular country. Perhaps the clearest example of that is Japan which has few natural resources and would be able to have little economic activity if it could not import them. That leads to the next part which is the ability to buy better goods and services which if we stick with the Japanese theme was illustrated by the way the UK bought so many of their cars. Of course this has moved on with Japanese manufacturers now making cars in the UK which shows how complex these issues can be.

Also the provision of larger markets will allow some producers to exist at all and will put pressure on them in terms of price and quality. Thus in a nutshell we end up with more and better goods and services. It is on these roads that trade boosts world economic activity and it is generally true that world trade growth exceeds world economic activity of GDP (Gross Domestic Product) growth.

Since the Second World War, the
volume of world merchandise trade
has tended to grow about 1.5 times
faster than world GDP, although in the
1990s it grew more than twice as fast. ( World Trade Organisation)

Although like in so many other areas things are not what they were.

However, in the aftermath of the global
financial crisis the ratio of trade growth
to GDP growth has fallen to around 1:1.

Although last year was a good year for trade according to the WTO.

World merchandise trade
volume grew by 4.7 per
cent in 2017 after just
1.8 per cent growth
in 2016.

How Much?

Trying to specify the gains above is far from easy. In March there was a paper from the NBER which had a go.

About 8 cents out of every dollar spent in the United States is spent on imports………..The estimates of gains from trade for the US economy that we review range from 2 to 8 percent of GDP.

Actually there were further gains too.

When the researchers adjust by the fact that domestic production also uses imported intermediate goods — say, German-made transmissions incorporated into U.S.-made cars — based on data in the World Input-Output Database, they conclude that the U.S. import share is 11.4 percent.

So we move on not enormously the wiser as we note that we know much less than we might wish or like. Along the way we are reminded that whilst the US is an enormous factor in world trade in percentage terms it is a relatively insular economy although that is to some extent driven by how large its economy is in the first place.

Any mention of numbers needs to come with a warning as trade statistics are unreliable and pretty universally wrong. Countries disagree with each other regularly about bilateral trade and the numbers for the growing services sector are woeful.

Comment

This is one of the few economic sectors where theory is on a sound footing when it meets reality. We all benefit in myriad ways from trade as so much in modern life is dependent on it. It has enriched us all. But the story is also nuanced as we do not live in a few trade nirvana, For example countries intervene as highlighted by the World Trade Organisation in its annual report.

Other issues raised by members
included China’s lack of timely and
complete notifications on subsidies
and state-trading enterprises,

That is pretty neutral if we consider the way China has driven prices down in some areas to wipe out much competition leading to control of such markets and higher prices down the road. There were plenty of tariffs and trade barriers long before the Donald became US President. Also Germany locked in a comparative trade advantage for itself when it joined the Euro especially if we use the Swiss Franc as a proxy for how a Deutschmark would have traded ( soared) post credit crunch.

Also there is the issue of where the trade benefits go? As this from NBC highlights there were questions all along about the Trans Pacific Partnership.

These included labor rights rules unions said were toothless, rules that could have delayed generics and lead to higher drug prices, and expanded international copyright protection.

This leads us back to the issue of labour struggling (wages) but capital doing rather well in the QE era. Or in another form how Ireland has had economic success but also grotesquely distorted some forms of economic activity via its membership of the European Union and low and in some cases no corporate taxes. Who would have thought a country would not want to levy taxes on Apple? After all with cash reserves of US $285.1 billion and rising it can pay.

So the rhetoric and actions of the Donald does raise fears of trade wars and if it goes further the competitive devaluations of the 1920s. But it is also true that there are genuine issues at play which get hidden in the melee a bit like Harry Kane after his first goal last night.

 

 

 

 

 

 

Japan is a land of high employment but still no real wage growth

Some days quite a few of our themes come naturally together and this morning quite a few strands have been pulled together by the news from Nihon the land of the rising sun. Here is NHK News on the subject.

Workers in Japan are continuing to take home bigger paychecks. A government survey says monthly wages rose year-on-year for the 9th-straight month in April.

Preliminary results show that pay for the month averaged about 277,000 yen, or roughly 2,500 dollars. That includes overtime and bonuses.

The number is an increase of 0.8 percent in yen terms from a year earlier. But when adjusted for inflation, the figure came in flat.

Nonetheless, labor ministry officials say that wages are continuing on a trend of moderate gains.

As you can see this is rather familiar where there is some wage growth in Japan but once we allow for inflation that fades away and often disappears. This is a particular disappointment after the better numbers for March which were themselves revised down as Reuters explains below.

That follows a downwardly revised 0.7 percent annual increase in real wages in March, which suggests that the government’s repeated efforts to encourage private-sector wage gains have fallen flat.

Growth in March was the first in four months, which had fueled optimism that a gradual rise in workers’ salaries would stimulate consumer spending in Japan.

Actually Reuters then comes up with what might be one of the understatements of 2018 so far.

The data could be discouraging for the Bank of Japan as it struggles to accelerate inflation to its 2 percent price target.

Let us now step back and take a deeper perspective and review this century. According to Japan Macro Advisers real wages began this century at 114.1 in January 2000 and you already get an idea of this part of the “lost decade” problem by noting that it is based at 100 some fifteen years later in 2015. As of the latest data it is at 100.5 so it has been on a road to nowhere.

Abenomics

One of the features of the Abenomics programme which began in December 2012 was supposed to be a boost to wages. The Bank of Japan has launched ever more QE ( which it calls QQE in the same way that the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield) as shown below. From July 2016.

The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen.

This is the main effort although as I have noted in my articles on the Tokyo Whale it has acquired quite an appetite for equities as well.

The Bank will purchase ETFs so that their amount outstanding will increase at an annual
pace of about 6 trillion yen(almost double the previous pace of about 3.3 trillion yen)

As it likes to buy on dips the recent Italian crisis will have seen it buying again and as of the end of March the Nikkei Asian Review was reporting this.

The central bank’s ETF holdings have reached an estimated 23 trillion yen based on current market value — equivalent to more than 3% of the total market capitalization of the Tokyo Stock Exchange’s first section — raising concerns about pricing distortions.

So not the reduction some were telling us was on the way but my main point today was that all of this “strong monetary easing” was supposed to achieve this and it hasn’t.

The Bank will continue with “QQE with a Negative Interest Rate,” aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.

The clear implication was that wages would rise faster than that. It is often forgotten that the advocates of QE thought that as prices rose in response to it then wages would rise faster. But that Ivory Tower world did not turn up as the inflation went into asset prices such as bonds,equities and houses meaning that wages were not in the cycle. Or as Bank of Japan Governor Kuroda put it at the end of last month.

Despite these improvements in the real economy, prices and wages have remained sluggish. This phenomenon has recently been labeled the “missing inflation” or “missing wage inflation” puzzle………. It is urgent that we explore the mechanism behind the changes in price and wage dynamics especially in advanced economies.

Most people would think it sensible to do the research before you launch at and in financial markets in such a kamikaze fashion.

The economy

There are different ways of looking at this. Here is the economic output position.

The economy shrank by 0.6 percent on an annualized basis, a much more severe contraction than the median estimate for an annualized 0.2 percent.

Fourth quarter growth was revised to an annualized 0.6 percent, down from the 1.6 percent estimated earlier. ( Reuters)

Imagine if that had been the UK we would have seen social media implode! As we note that over the past 6 months there has been no growth at all. In case you are wondering about the large revision those are a feature of the official GDP statistics in Japan which reverse the stereotype about Japan by being especially unreliable.

If we move to the labour market we get a different view. Here we see an extraordinary low-level of unemployment with the rate being a mere 2.5% and the job situation is summed up by this from Japan Macro Advisers.

In March 2018, New job offers to applicant ratio, a key indicator in Japan to measure the tightness of the labor demand/supply was 2.41 in March, signifying that there are 2.41 new job postings for each new job seeker. The ratio of 2.41 is the highest in the statistical history since it begun in 1963.

So the picture is confused to say the least.

Comment

There is a fair bit to consider here but let us start with the reality that whilst there are occasional flickers of growth so far the overall pattern in Japan is for no real wage growth. Only yesterday we were looking at yet another Bank of England policymaker telling us that wage growth was just around the corner based on a Phillips Curve style analysis. We know that the Bank of England Ivory Tower has an unemployment rate of 4,25% as the natural one so that the 2.5% of Japan would see Silvana Tenreyro confidently predicting a wages surge. Except reality is very different. If we stick to the UK perspective we often see reports we are near the bottom of the real wage pack but some cherry picking of dates when in fact Japan is  worse.

Moving back to Japan there was a paper on the subject of low unemployment in 1988 from Uwe Vollmer which told us this.

Even more important, the division of annual labour income
into basic wages, overtime premiums and bonuses
allows companies to adjust wages flexibly to changes in
macroeconomic supply and demand conditions,
resulting in low rigidities of both nominal and real wages.

On the downside yes on the upside no as we mull the idea that in the lost decade period Japan has priced itself into work? If so the Abenomics policy of a lower exchange-rate may help with that but any consequent rise in inflation will make the Japanese worker and consumer worse off if wages continue their upwards rigidity.

Meanwhile as we note a year where the Yen was 110 or so a year ago and 110 now there is this from an alternative universe.

The Bank of Japan’s next policy move may be to raise its bond-yield target to keep the yen from weakening too much, according to a BOJ adviser and longtime associate of Gov. Haruhiko Kuroda.

Or maybe not.

With its inflation target still far away, the BOJ must continue its current monetary stimulus for now, Kawai said

Also in his land of confusion is a confession that my critique has been correct all along.

While a weak yen helps the BOJ’s efforts to stoke inflation — and has been an unspoken policy objective — too much weakness can hurt businesses that import raw materials, while some consumers would feel the pain of higher prices for imports.

He seems lost somewhere in the Pacific as in terms of the economics the economy has seen a weak patch and you are as far away as ever from your inflation target yet you do less? Still the inflation target will be helped by a higher oil price except as I often point out Japan is a large energy importer so this is a negative even before we get to the fact that it makes workers and consumers poorer.