Japan sees quite a GDP contraction in spite of the Bank of Japan buying 8% of the equity market

by Shaun Richards

Overnight the agenda for today was set by news out of the land of the rising sun or Nihon. Oh and I do not mean the effort to reproduce the plot line of the film Alien ( Gaijin) for those poor passengers on that quarantined cruise ship. It was this reported by the Asahi Shimbun.

Gross domestic product declined by a seasonally adjusted 1.6 percent in the quarter from the previous three months, or an annualized 6.3 percent, the Cabinet Office figures showed.

The contraction of 6.3 percent was far worse than expectations of many private-sector economists, who predicted a shrinkage of 4 percent or so.

Just to clarify the quarterly fall was 1.6% or using the Japanese style 6.3% in annualised terms. What they do not tell us is that this means that the Japanese economy was 0.4% smaller at the end of 2019 than it was at the end of 2018. So quite a reverse on the previous trend in 2019 which was for the annual rate of growth to pock up.

The Cause

Let me take you back to October 7th last year.

After twice being postponed by the administration of Prime Minister Shinzo Abe, the consumption tax on Tuesday will rise to 10 percent from 8 percent, with the government maintaining that the increased burden on consumers is essential to boost social welfare programs and reduce the swelling national debt. ( The Japan Times )

I pointed out back then that I feared what the impact of this would be.

This is an odd move when we note the current malaise in the world economy which just gets worse as we note the fact that the Pacific region in particular is suffering. We looked at one facet of this last week as Australia cut interest-rates for the third time since the beginning of the summer.

As you can see this was a risky move and it came with something of an official denial of the economic impact.

 about a quarter of the ¥8 trillion cost of the 2014 hike, according to the government and the Bank of Japan.

The 2014 rise in the Consumption Tax ( in rough terms the equivalent of VAT in the UK and Europe) had hit the Japanese economy hard, so the official claim of that the new impact would be a quarter was something I doubted. Now let us return to the Asahi Shimbun this morning.

Japan’s economy shrank in the October-December period for the first time in five quarters, as the sales tax hike and natural disasters pummeled personal consumption, according to preliminary figures released on Feb. 17.

The exact numbers are below.

Personal consumption, which accounts for more than half of Japan’s GDP, grew by 0.5 percent in the July-September period.

But the figure plunged to minus 2.9 percent for the three months from October, when the government raised the consumption tax rate to 10 percent from 8 percent.

We had previously looked at the boost to consumption before the tax rise as electrical appliances in particular were purchased. This will have flattered the economic data for the third quarter of last year and raised the GDP growth rate. But as you can see the party has had quite a hangover. On its own this would have led to a 2.2% decline in quarterly GDP.

The spinning has continued apace.

Yasutoshi Nishimura, minister in charge of economic revitalization, gave a positive outlook for personal consumption in a statement released on Feb. 17.

“The margin of decline in personal consumption is likely to shrink,” he said.

As John Lennon points out in the song Getting Better.

It can’t get no worse

As ever there is a familiar scapegoat which is the weather.

Destructive typhoons that hit eastern Japan and the warmer winter also fueled the slowdown in personal spending, such as purchases of winter clothes.

Although as @Priapus has pointed out there was an impact on the Rugby World Cup and the Japanese Grand Prix.

Investment and Exports

These will be on people’s minds as we try to look forwards. According to the Asahi Shimbun the situation for investment is also poor.

Investment in equipment by businesses, for example, shrank by 3.7 percent, a sharp decline from a rise of 0.5 percent in the preceding quarter, while housing investment tumbled 3.7 percent from an increase of 1.2 percent.

New housing starts have also been waning since the tax hike.

Many companies’ business performances are deteriorating, particularly in the manufacturing sector.

The business investment fall was presumably in response to the trade war and the deteriorating conditions in the Pacific economy we looked at in the latter part of 2019 and of course predates the Corona Virus. By contrast the Bank of Japan like all central banks will be more concerned about the housing market.

Switching to trade itself the position appears brighter.

In contrast, external demand pushed up GDP by 0.5 percentage point.

But in fact this was due to imports falling by 2.6% so a negative and exports fell too albeit by a mere 0.1%. That pattern was repeated for the annual comparison as exports were 2.2% lower than a year before and imports 4.3% lower. It is one of the quirks of the way GDP is calculated that a fall in imports larger than a fall in exports boosts GDP in this instance by 0.4%. Thus the annual comparison would have been -0.8% without it.

Comment

Sometimes the numbers are eloquent in themselves. If we look at the pattern for private consumption in Japan we see that it fell from 306.2 trillion Yen to 291.6 trillion in the first half of 2014 as the first tax rise hit. Well on the same seasonally adjusted basis and 2011 basis it was 294 trillion Yen in the last quarter of 2019. If we allow for the fact that 2014 saw a tax based boost then decline then consumption in 2019 had barely exceeded what it was before the first tax rise before being knocked on the head again. Or if you prefer it has been groundhog day for consumption in Japan since 2013. That is awkward on two counts. Firstly the Japanese trade surplus was one of the economic world’s imbalances pre credit crunch and expanding consumption so that it imported more was the positive way out of it. Instead we are doing the reverse. Also one of the “lost decade” issues for Japan was weak consumption growth which has just got weaker.

This leaves the Japanese establishment in quite a pickle. The government has already announced one stimulus programme and is suggesting it may begin another. The catch is that you are then throwing away the gains to the fiscal position from the Consumption Tax rise. This poses a challenge to the whole Abenomics programme which intended to improve the fiscal position by fiscal stimulus leading to economic growth. I am sure you have spotted the problem here.

Next comes the Bank of Japan which may want to respond but how? For newer readers it has already introduced negative interest-rates ( -0.1%) and bought Japanese Government Bonds like it is a powered up Pac-Man to quote the Kaiser Chiefs, But the extent of its monetary expansionism is best highlighted by this from Etf Stream earlier.

According to the BoJ funds flow report for Q3 2019, the bank now owns some 8% of the entire Japanese equity market, mostly through the current ETF-buying programme.

Hence the nickname of The Tokyo Whale.They think the rate of buying has slowed but I think that’s an illusion because it buys on down days and as The Donald so regularly tweets equity markets are rallying. Just this morning the German Dax index has hit another all-time high. But what do they do next? They cannot buy that many more ETFs because they have bought so many already. As you can see they are already a material player in the equity market and they run the Japanese Government Bond market as that is what Yield Curve Control means. Ironically the latter has seen higher yields at times in an example of how water could run uphill rather than down if the Bank of Japan was in charge of it. It will be wondering how the Japanese Yen has pretty much ignored today’s news.

Also as a final point. More and more countries are finding it hard to raise taxes aren’t they?

Podcast