A Last Fling for Japan

May 16, 2008

Many recent Japanese economic indicators point to scant, if any growth in the second quater, and activity in 3Q08 may not be much better. Consumer confidence slid to 35.2 in April from 36.8 on average in 1Q and 40.2 in 4Q07. The Economy Watcher’s diffusion index is also in the mid-30’s, connoting weakness in mid- and small service-sector firms. Exports expanded by a robust 11.7% in the fiscal year to March 2008 but by just 2.8% in March alone from a year before. Core domestic machinery orders were 10.0% lower in March than their first-quarter mean. The foreign marchinery orders counterpart was 15.8% smaller in March than its 1Q average. The index of leading economic indicators, wherein 50 also represents the line deliniating expansion from contraction on a scale from zero to 100, has been less than 50 in seven of the last eight reported months. The sum of the leading, coincident, and lagging indices in March fell short of 79.

And yet- real GDP grew 2.9% saar in the half year to March, including a rate of 3.3% last quarter. Since that half-year fling followed growth of 0.7% in the previous six months, on-year growth was low, befitting the somber range of Japanese growth forecasts. The biggest surprise in the Japanese national income account statistics for last quarter was a jump in private consumption of 3.4% saar, more than twice the fourth quarter’s pace, but it turns out that this figure wasn’t adjusted for February 29th in this leap year. Exports leaped 19.5% saar, fed by Asia’s hungry markets. That gain dwarfed a rise of 8.3% saar in imports and accounted for 5/8ths of Japanese GDP growth in the quarter. Residential construction bounced in the quarter, rebounding 19.5% saar to 16.6% below the 1Q07 level. It appears that Japan’s housing fiasco caused by overly zealous regulatory changes has run its course. The greatest disappointment last quarter was a drop of 3.4% saar in business investment, followed by a 1.4% y/y decline in the GDP deflator after -1.3% in the year to 4Q07.

Japan’s Nikkei-225 stock index is 20.6% higher than its 2008 low on March 17th. That trough came right before the taxpayer bailout of Bear Stearns and a 75-bp rate cut by the FOMC that put a floor under the dollar generally. Dollar/yen has subsequently recovered 9.4% from 95.77. But economists from the private and public sectors are under no illusion that the yen’s retreat will prove a panecea for Japan, especially as commodity price-induced inflation continues to erode real disposable household incomes. Forecasts of real GDP remain low, epitomized by the latest Economist poll of forecasters, which projects growth of 1.3% this year followed by 1.5% in calendar 2009. The view is that Japanese officials experienced one last fling in 4Q07 and 1Q08. The BOJ probably will not raise rates until late this year, if then, but similarly will not ease policy in response to weaker growth because of its fear of rising inflation.



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