Japan adds sharply falling imports to its continuing real wages problem

by Shaun Richards

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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