Japanese Economy Not as Insulated as Hoped

July 9, 2008

Japanese financial institutions held comparatively fewer bad loans when the global credit crunch struck last year.  With vestiges of deflation, there was less reason to worry about inflation in Japan than elsewhere.  Consumer prices excluding food and energy still show a 12-month dip of 0.1%.  Equity and land values were less inflated in Japan than in other developed economies.  The yen had not appreciated in recent years to the same degree as European currencies.  Nevertheless, Japan seems to be sharing fully in the slowdowns of North America and Europe.


The laundry list of adverse data trends is extensive.  The PMI-manufacturing index fell for a fifth straight time to 46.5 in June, lowest since February 2002 and down from a first-quarter monthly average of 50.9.  The Economy Watchers’ index sank to 29.5 in June compared to quarterly averages of 32.3 in 2Q and 34.1 in 1Q.  Another gauge of business conditions and sentiment for smaller-sized firms, the Shoko Chukin Index was at 40.7 in June, down from quarterly mean scores of 44.8 in 1Q08 and 46.4 in 4Q07.  Real household spending in May fell by 0.9% m/m and by 3.2% y/y, which was a deeper on-year drop than anticipated.  The Index of leading economic indicators has been less than 50 since last August.  The coincident index was below that threshold in 4 of the past 5 reported months, and the lagging index was at zero in its most recent reading.  A quarterly regional survey found growth in 2Q to have slowed in all but one of Japan’s nine regions.  Housing starts in April-May posted an on-year drop of 7.6%, almost as bad as the 8.8% decrease between 1Q07 and 1Q08.  Construction orders plunged 16.8% y/y in April-May.  Corporate profits are falling, and bankruptcies in June were 11.7% greater than in June 2007.  On-year export growth slowed from 10.2% in 2H07 to 8.7% in January-February and just 3.8% in March-April.  Investment spending is almost flat, and core private domestic orders for machinery were 0.1% less in April-May than in 1Q08, suggesting more of the same.  Industrial production fell 0.7% in 1Q and was 0.5% lower in April-May than in 1Q08.  According to government officials, previous improvement in employment has paused.  Consumer confidence slid in May to 33.9 from quarterly averages of 36.8 in 1Q, 40.2 in 4Q07 and 44.2 in 3Q07.  Along with the United States, Britain, Spain, and Italy, Japan is seemingly in a close encounter with recession, which will feel like one even if the numbers don’t explicitly confirm it.  With an overnight money rate of only 0.5%, monetary policy is stuck between a rock and a hard place.



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