Awaiting More Weak Japanese Data

July 28, 2008

In an economy that expanded 4.0% at a seasonally adjusted annualized rate in the latest reported quarter and by 2.9% saar in the quarter before that, one ordinarily does not expect to hear warnings about a coming recession.  However, that’s exactly what’s happening in Japan.  Despite decent quarterly growth in 4Q07 and 1Q08, real GDP rose just 1.0% in the year to 1Q08, with drops of 16.6% in residential construction, 2.4% in non-residential private investment and 1.8% in public investment.  Personal consumption increased by a rather tepid 1.5%, and overall growth was heavily reliant upon an 11.7% increase in exports.  However, customs export values posted their first on-year decline in June since November 2003, as both volumes (-1.4%) and prices (-0.3%) contributed to the drop.  Exports to the United States and EU fell by 15.4% and 11.2%, while shipments to Asia edged just 1.5% higher.  Consumption has been squeezed by higher food and energy costs.  When consumption, equity prices and exports sputter, little incentive remains for firms to spend on capacity expanding equipment.  Private analysts aren’t the only people bearish about Japan.  The government and Bank of Japan both released very gloomy economic assessments in July, and even super-hawk Mizuno from the central bank Policy Board has warned of a possible recession.

Labor statistics and household spending and income data will be released tonight at 23:30 GMT, followed by retail sales at 23:50 GMT.  The jobless rate in June likely edged up to 4.1% from 4.0% and a cyclical low of 3.6% in July 2007, and the job offers-to-seekers ratio probably slid below May’s 0.92 and further from its high of 1.09 in July 2006.  Weak spending numbers have been heralded by news of a 7.6% on-year plunge in department store sales, which outweighed a 4.2% improvement in convenience store sales.  Industrial production, due Tuesday night at 23:50 GMT will show a monthly drop of around 2.0%, reversing most of the prior month’s gain and resulting in a 12-month percentage change near zero.  The Shoko Chukin index, a gauge of smaller firm activity, also gets released tomorrow, and will probably drop to less than 40.  On the following day, housing starts are apt to reveal a drop of close to 20%, and construction orders also arrive looking soft.  The only area pointing upward these days has been inflation, and that’s a qualified assessment.  Corporate service prices rose 1.2% in the year to June, most in 11 months, and corporate goods prices increased 5.6% in the year to June, sharply above its 1.8% advance in the prior twelve months.  All consumer prices increased at a 2.6% annualized rate during 1H08, and what Japan defines as core inflation (excluding only seasonal food) rose 2.2% saar.  However, core inflation in the way that other countries define such (excluding both energy and food) was unchanged between December 2007 and June 2008, which actually was marginally below the 0.2% annualized rate of climb in 2H07.

The Nikkei had dropped nearly 13% since end-2007, and 10-year JGB yields are about 30 basis points lower than their mid-June highs.  From highs in March, the yen has depreciated 10.4% against the euro and 11.1% relative to the dollar.



Comments are closed.