Today we get to look East to the land of the rising sun or Nihon as we note its latest economic output figures. According to the Japanese owned Financial Times we should look at them like this.
Japan’s GDP decline less severe than US and Europe
Of course as we are looking at a country where the concept of the “Lost Decade” began in 1990 and is now heading into number 4 of them we need to be careful about which period we are looking at.
Japan’s economy shrank by a record 7.8 per cent in the second quarter of 2020 as it outperformed the US and Europe but lagged behind neighbouring South Korea and Taiwan in its response to coronavirus.
Okay so better than us in the West but not as good as its eastern competitors. Also I note that it relies quite a bit on seasonal adjustment when we have just had an economic season unlike any other as without it GDP fell by 9.9%.
Returning to the seasonally adjusted data we see a consequence of being an exporter at a time like this.
A fall in private consumption accounted for 4.8 percentage points of the decline in Japan’s GDP as the state of emergency reduced spending in shops and restaurants, while a large drop in exports accounted for the remaining 3 percentage points.
This is because exports fell by 18.5% with imports barely affected ( -0.5%) so there was a plunge in exports on a scale large enough to reduce GDP by 3%. Actually let me correct the FT here as it was domestic demand which fell by 4.8% with private consumption accounting for 4.5% and investment for 0.2% and the government sector not doing much at all. You may be pleased to read that Imputed Rent had only a minor impact on the quarterly change.
A cautionary note is that Japanese GDP data is particularly prone to revision or as the FT puts it.
Business investment was surprisingly strong, however, and contributed just 0.2 percentage points to the overall decline in output. That figure is often revised in updates to the data, but if confirmed, it would suggest resilience in the underlying economy and potential for a strong rebound.
International Comparison
Regular readers will know that due to the extraordinary move in the UK GDP Deflator ( the inflation measure for this area) of 6.2% in a single quarter our GDP fall may well have been more like 15%. Somehow the FT which is often very enthusiatic about combing through UK data has missed this.
The second-quarter decline in Japan’s GDP was comparable to a 9.5 per cent fall in the US during the same period, or a 10.1 per cent drop in Germany. It was less severe than the drop of more than 20 per cent in the UK, which was late to act but then imposed a severe lockdown. However, Japan did worse than neighbouring South Korea, where output fell 3.3 per cent in the second quarter, or Taiwan, where GDP was down just 0.7 per cent. Both countries managed to control the virus without extensive lockdowns, allowing their economies to function more normally.
It is typical of a Japanese owned publication to trumpet a form of national superiority though.
Japan’s performance relative to other advanced countries highlights how the effectiveness of a country’s coronavirus response affects the economy, with Japan forced to close schools but able to avoid the strict lockdowns used in Europe.
However, only time will tell whether that was more of a tactical than a strategic success.
Japan is suffering an increase in infections, with new cases running at more than 1,000 a day, but it has not imposed a fresh state of emergency.
Let me wish anyone who is ill a speedy recovery.
Context
The initial one is the economic output has now fallen in the last 3 quarters. Following the rise in Consumption Tax from 8% to 10% a decline was expected but now.of course, it looks really badly timed. Although in the period of the Lost Decade there is a bit of a shortage of good times to do such a thing.
Japan has if we look at the seasonally adjusted series gone back the beginning of 2010 and the middle of 2011 which was the same level.It has never achieved the “escape velocity” talked about by former Bank of England Governor Mark Carney.
Bank of Japan
The problem for it is that it was already doing so much or as the Red Queen put it.
“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”
I noted Bloomberg reporting that it owns so 44% of the Japanese Government Bond market these days. Although there is an element of Alice In Wonderland here as via its stimulus programmes the Japanese government will be issuing ever more of them.
In May, the Japanese government approved a second large-scale ¥117tn ($1.1n or 21% of Japan’s GDP) economic rescue package, matching the size of the first stimulus introduced in April. ( OMFIF).
So there will be plenty more to buy so we can expect full employment to be maintained for the bond buyers at the Bank of Japan.
On a gross basis, the government plans to issue close to ¥253tn ($2.3tn) in government bonds and treasury bills in fiscal year 2020 (ending March 2021). This amount combines issues under all three budgetary plans. Excluding refinancing bonds, the net issuance of government bonds is reduced to almost ¥145tn (about 27% of GDP). This includes close to 4% of front-loaded bond issues from future fiscal years and is the largest net issuance in the post-world war II era.
Next there is its role as The Tokyo Whale to consider.
The Bank of Japan now holds nearly 6% of market cap of the larger Topix Index. pic.twitter.com/pQoZc9swTa
— Asif Abdullah (@Asif_H_Abdullah) August 10, 2020
This phase saw the Bank of Japan buy on up as well as down days and the index it looks to match is the Nikkei 400.
There is also the negative interest-rate of -0.1% which I do not think the Bank of Japan has ever been especially keen on which is why it is only -0.1%. After all the years of propping up the banks we can’t have them failing again can we.
The latest move as is so often the case has echoes of the past so let me hand you over to Governor Kuroda.
The first is the Special Program to support corporate financing. The total size of this program is about 120 trillion yen. It consists of purchases of CP and corporate bonds with the upper limit of about 20 trillion yen and the Special Funds-Supplying Operations, which can amount to 100 trillion yen. Through this operation, the Bank provides funds on favorable terms to financial institutions that make loans in response to COVID-19. This operation also includes a scheme in which the government takes the credit risk while the Bank provides liquidity, thereby supporting financing together.
Comment
Japan is a mass of contradictions as we note that annual GDP was higher in the mid 1990s than it is now. The first switch is that the position per head is much better although that is partly because the population is in decline. Of course in terms of demand for resources that is a good thing for a country which has so few of them. That is not so hot when you have an enormous national debt which will be getting a lot larger via the stimulus effort. There are roads where it will reach 300% of GDP quite soon.
So why have things not collapsed under the weight of debt? One reason is the size of the Bank of Japan purchases in what is mostly (90% or so) a domestic market. Then we also need to note that in spite of it being official policy to weaken the Yen ( one of the arrows of Abenomics) it is at 106.4 versus the US Dollar looking strong in spite of all of the above. This is because even if the foreign investors started to leave the Japanese have large savings abroad and large reserves. As we stand they have had little success in pushing the Yen lower even with all the efforts of the Bank of Japan.
What is needed is some sustained economic growth but if Japan could do that the concept of the Lost Decade would have been consigned to the history books and it hasn’t. So we left with this thought by Graham Parker.
And there’s nothing to hold on to when gravity betrays you ( Discovering Japan)
Podcast on GDP measures