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.

 

 

 

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The Bank of Japan is exploring the outer limits of monetary policy

Today I wish to invert my usual rule and open with a look at financial markets because in this instance they help to give us an insight into the real economy.

The Nikkei 225 average tumbled 650.23 points, or 3.01 percent, to end at 20,977.11, its first closing below 21,000 since Feb. 15. On Friday, the key market gauge rose 18.42 points.

The Topix, which covers all first-section issues on the Tokyo Stock Exchange, finished 39.70 points, or 2.45 percent, lower at 1,577.41 after gaining 2.72 points Friday. ( The Japan Times)

We have a crossover here as Japan catches up with what western markets did on Friday. But if we return to Friday’s subject of expected central bank activity, well in Japan it is already happening. In other markets discussions of the existence of a Plunge Protection Team for stock markets are more implicit than explicit but Japan actually has one. The Bank of Japan or as it has become known the Tokyo Whales does so and according to its accounts bought some 70,200,000.000 Yen’s worth this morning in its attempt to resist the fall. That amount has become a habit in more ways than one as on days of solid falls that is the amount it buys as for example it bought the same amount on the 13th, 8th and 7th of this month. It’s total holdings are now at least 24,595,566,159,000 Yen and I write at least because whilst it declares most of them explicitly in its accounts some other holdings are tucked away elsewhere.

Monetary Policy

To finance these purchases the Bank of Japan creates money and expands the monetary base. It adds to its other attempts to do so as for example it also buys commercial property ( in a similar route to the equity market it buys exchange-traded funds or ETFs) as well as commercial paper and corporate bonds. But the main effort is here.

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.
7 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.

As you can see it is buying pretty much everything with the only variable left being how much. If we stay with that theme we have seen regular media reports that it is tapering it s buying of which the latest was Bloomberg on the 14th, Those reports have varied from being outright wrong ( about equity purchases) to nuanced as for example circumstances can limit the size of JGB buys.

Meanwhile, the government would continue to undertake expenditure reforms and reduce the
amount of newly issued government bonds for fiscal 2019 by about 1 trillion yen compared to that for fiscal 2018. ( Bank of Japan)

But also market developments play a role as I note this from @DavidInglesTV this morning.

Japan 10Y yields collapse further into negative territory

There is a bit of hype in the use of the word collapse to represent the benchmark yield falling to -0.06% but there are relevant factors in play. For example yet another benchmark bond yield is moving further into negative yield territory as Japan accompanies Germany. Next we have an issue for Bank of Japan policy as it is left sitting on its hands if Mr(s) Market takes JGBs to where its “guidance” is anyway meaning it does not have to buy more. So its bond buyers are left singing along with the Young Disciples.

Apparently nothing
Nothing apparently
Apparently nothing
Nothing apparently

The Yen

This is another area where the Bank of Japan is active. These days it is not that often in the news promising “bold action” and much less actually explicitly intervening. But according to economics 101 all the money printing ( more technically expansion of the monetary base) should lead to a lower Yen. For a while it did but these days the position is more nuanced as The Japan Times reminds us.

The stronger yen battered export-oriented issues. Industrial equipment manufacturers Fanuc sagged 3.84 percent and Yaskawa Electric 5.35 percent, and electronic parts supplier Murata Manufacturing lost 3.14 percent.

In a way here the Tokyo Whale is spoilt for choice as it could act to weaken the Yen and/or buy ETFs with those equities in them. But the reality is that lower equity markets create a double-whammy for it as hoped for wealth effects fade and a flight to perceived safety strengthens the Yen. Thus we find the Yen at around 110 to the US Dollar as I type this.

One of the central tenets of Abenomics was supposed to be the delivery of a 2% annual inflation target which would “rescue” Japan from deflation. Yet mostly through the way the Yen has resisted the downwards pressure leaves us observing this.

As for prices, members concurred that the year-on-year rate of change in the CPI for all items less fresh food was in the range of 0.5-1.0 percent, and the rate of increase in
the CPI for all items less fresh food and energy remained in the range of 0.0-0.5 percent, due partly to firms’ cautious wage- and price-setting stance.

The all items inflation rate was 0.2% in February. The situation is a clear failure leading one Board Member to spread the blame.

households’ tolerance of price rises had not shown clear improvement and services prices in such sectors as dining-out had not risen as much as expected.

Comment

We can now bring in a strand from recent articles which has been illustrated earlier by the former chair of the US Federal Reserve Janet Yellen.

*YELLEN: GLOBAL CENTRAL BANKS DON’T HAVE ADEQUATE CRISIS TOOLS ( @lemasabachthani )

Also something which we figured out some months back.

*YELLEN: FED TO OPERATE WITH LARGE BALANCE SHEET FOR LONG TIME

Also let me throw in something which shows an even deeper lack of understanding.

Former U.S. Federal Reserve Chair Janet Yellen said Monday that the U.S. Treasury yield curve[s:TMUBMUSD10Y], which inverted on Friday for the first time since 2007, may signal the need to cut interest rates at some point, but it does not signal a recession. ( @bankinformer )

Firstly central bankers have pretty much a 100% failure rate when it comes to forecasting recessions. Next we have an issue where they help create an inverted yield curve then worry about it! That may turn out to be something with very different effects to one achieved more naturally.

But the real issue here is that Janet like her ilk is guiding us towards more monetary easing but we have been observing for some years that in terms of the Shangri-Las the Bank of Japan is the Leader of the Pack. But once we switch to how is that going we hit trouble. From Friday.

The flash Nikkei Manufacturing PMI for March remained unchanged at 48.9 in March, registering below the 50.0 no change level for a second successive month to indicate an ongoing downturn in the goods-producing sector. The latest readings are the lowest recorded since June 2016.

Among the various survey sub-indices, the output index signalled a third consecutive monthly fall in manufacturing production, with the rate of decline accelerating to the fastest since May 2016. The drop in production was the third largest seen since 2012.

Now today.

Japan’s new vehicle sales in fiscal 2019 are projected to fall 2.0 percent from the current fiscal year to 5.22 million units amid growing economic uncertainty, an industry body said Monday. ( The Mainichi )

That adds to the slow down in the real growth rate such that GDP rose in the final quarter of 2018 by a mere 0.3% on a year before. Not exactly an advert for all the monetary easing is it?

Weekly Podcast

 

 

 

 

 

 

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

 

 

The Bank of Japan reminds us it is all about the banks

It is time for another part of our discovering Japan theme as we travel to Nagoya, where Governor Kuroda of the Bank of Japan was talking earlier today. Let us open with some good news.

The real GDP has been on an increasing trend, albeit with fluctuations, and the output gap — which shows the utilization of capital and labor — widened within positive territory from late 2016, for seven consecutive quarters through the April-June quarter of 2018 . Under such circumstances, the duration of the current
economic recovery phase, which began in December 2012, is likely to have reached 69 consecutive months this August. If this recovery continues, its duration in January next year will exceed the longest post-war recovery phase of 73 months.

So reasons to be cheerful part one, and below we get part two, but as you can see part three is a disappointment.

In the Outlook Report released last week, the real GDP growth rate for fiscal 2018 is projected to be 1.4 percent, and this is clearly above Japan’s potential growth rate, which is estimated to be in the range of 0.5-1.0 percent. As for fiscal 2019 and 2020, the real GDP growth rates are both projected to be 0.8 percent.

Economics gets called the dismal science but at the moment central bankers are trying to under perform that with the UK having a growth “speed limit” of 1.5% and the ECB saying something similar. The Bank of Japan is even more downbeat which is partly related to the demographics of both an ageing and declining population. This is partly because the previous foundation of their Ivory Towers called the output gap has failed so badly in the credit crunch era but the more eagle-eyed amongst you will have noted a reference to it above. How is that going?

The Output Gap

It is “boom,boom,boom” according to the Black-Eyed Peas and the emphasis is mine.

In the labor market, the active job openings-to-applicants ratio has been at a high level that exceeds the peak of the bubble period, and the unemployment rate has declined to around 2.5 percent. The number of employees has registered a year-on-year rate of increase of around 2 percent, and total cash earnings per employee have risen moderately but steadily.

As you can see the Japanese output gap is already struggling as we are apparently beyond bubbilicious in terms of demand but wage growth is only moderate. What about inflation?

The year-on-year rate of change in the consumer price index (CPI) has continued to show relatively weak developments compared to the economic expansion and the labor market tightening, and that excluding fresh food
and energy prices has been at around 0.5 percent.

In fact after deploying so much effort Governor Kuroda abandons his favourite measure for a higher one.

The year-on-year rate of increase in the CPI (all items less fresh food) has continued to accelerate, albeit with fluctuations. Although there is still a long way to go to achieve the price stability target of 2 percent, the year-on-year rate of change recently has risen to around 1 percent, which is about half the target .

Actually the state of play here is as  strong of a critique of the original claims about QE as we have as according to the central bankers it would raise inflation. Whilst it has created asset price inflation there has been a lack of consumer inflation except in places where currencies have fallen, and in Japan not even much of that. Indeed whilst I would welcome the development below Governor Kuroda will be crying into his glass of sake.

What lies behind this likely is that people’s tolerance of price rises has decreased.

 

Monetary Policy

We have found something which has given the Bank of Japan food for thought. Output gap failure? Rigging so many markets? Impact on individual Japanese? Of course not! It is worries about the banks.

The Bank fully recognizes that, by continuing such monetary easing, financial institutions’
strength will be cumulatively affected by low profitability, mainly through a decrease in
their lending margins, and that it could have an impact on financial system stability as well
as the functioning of financial intermediation.

This is a little mind-boggling as we note that policies which were instituted to help the banks are now being described as hurting them. This is because the banks did not have to change and pretty much carried on as before knowing that they are too big to be allowed to fail. Also I though central banks and regulators were on the case these days but apparently not.

That is, if financial institutions become more active in risk taking to secure profits amid the low interest rate environment and severe competition continuing, the financial system could destabilize should large negative shocks actually occur in the future.

This if we think about it is quite a confession of failure. We have already looked at how economic policy has been directed to suit the banks and in Japan’ case that has continued for nearly thirty years now. Next we seem to have a loss of faith in the new regulations which were supposed to fix this. Finally we have something of a confession that it could all happen again!

If we looked wider we do see some context for example in the way that the European bank stress tests were widely ignored over the weekend. I think that those interested have already voted via bank share prices in 2018, but we do see something rather familiar via @jeuasommenulle.

While everybody is having fun bashing EU banks and pointing out that market volatility on Italian govies will hurt bank capital… the US quietly removes rules that make market volatility impact capital in the 1st place 🤪

Yep back to mark to model rather than mark to market. Just like last time in fact, what could go wrong?

You and I get told what to do but the banks get a different message.

encourage them to take concrete actions as necessary.

The Tokyo Whale

The Bank of Japan has been living up to its reputation and moniker.

The Bank of Japan bought a monthly record of 870 billion yen ($7.68 billion) in exchange-traded funds in October, apparently aiming to support equities as investors turned bearish amid sell-offs in U.S. shares. ( Nikkei Asian Review)

Back on the 23rd of October I pointed about I was bemused by the Japanese owned Financial Times report on a “stealth taper”.

The central bank has become more flexible on its annual ETF purchase quota of around 6 trillion yen — a mark it will likely exceed by year-end at the current pace. ( NAR)

Another Japanese style development comes from this.

 But its large-scale purchases under Gov. Haruhiko Kuroda’s massive monetary easing program were criticized for propping up share prices for a limited range of companies and distorting the market.

To which the classically Japanese response is of course to rig even more of them.

This prompted the BOJ to decide this July to spread out buying more widely.

 

Comment

The comments about an interest-rate hike from Japan are mostly driven by this from today’s speech.

Japan’s economic activity and prices are no longer in a situation where decisively implementing a large-scale policy to overcome deflation was judged as the most appropriate policy conduct, as was the case before.

The problem with such rhetoric comes from the section about as we note that Bank of Japan bought a record amount of equities via ETFs in October. Also this summer it give a specific pronouncement on this subject which was repeated today.

Specifically, the Bank publicly made clear to “maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding economic activity and prices including the effects of the consumption tax hike scheduled to take place in October 2019.”

Indeed he even hints at my “To Infinity! And Beyond!” theme.

it has become necessary to persistently continue with powerful monetary easing while considering both the positive effects and side effects if monetary policy in a balanced manner.

So they will continue the side effects but carry on regardless unless of course the side effects become an even bigger problem for the banks. The status quo continues to play out.

Whatever you want
Whatever you like
Whatever you say
You pay your money
You take your choice
Whatever you need
Whatever you use
Whatever you win
Whatever you lose.

Podcasts

I plan to begin a new series of weekly podcasts this Friday.If anyone has any thoughts or suggestions please let me know.

 

 

 

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.

 

 

 

 

 

 

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?

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.