Japanese Situation Getting Much Worse

October 22, 2008

The good news supposedly is that Japan’s financial institutions already experienced a major purge much earlier this decade, but that positive factor is being drowned in a sea of bad news. The economy has joined Europe and the United States in recession, and Japanese prospects are darkening. The Bank of Japan’s quarterly regional economic report released this week made downward assessments to all nine regions. This had never been done before. The situation on the Northern island of Hokkaido has become somewhat severe, and four other regions were reclassified as sluggish, meaning in recession. One region now has widespread weakness. One is somewhat weak, and another is mostly flat with some weakness. Only one area still shows a high level of activity, but the trend is down even there. Consumption and industrial production overall showed more widespread weakness than in July.

The Aso cabinet’s October economic report said “the economy has weakened further,” a downgrade from “weakening recently.” Exports were downgraded to “decreasing moderately” and industrial production to “decreasing.” The employment situation is now “getting worse” instead of just exhibiting a weak tone. Consumption was downgraded to “almost flat with some weak movements lately.” Government analysts expect the recession to continue for the time being and warned about the risks of a more severe recession caused by the financial crisis in the U.S. and Europe and volatile stock and exchange markets. It’s not volatility per se that’s bodes poorly so much as the cumulating rise of the yen and plunge of Japanese share prices. The yen over the past week rose 2.6% against the dollar and 8.5% against the euro, and Japan’s currency has appreciated 10.2% against the dollar and 26.5% against the euro since the end of August. The Nikkei shed 9.1% during the past five sessions and has lost 33.6% of its value since end-August. In the past, movements not nearly so sharp would have sparked considerations of currency market intervention, especially since Beijing has stopped allowing the yuan to advance.

Japanese data also depict a worsening recession.  The on-year declines in September were greater than in August for department store sales (-4.7% after -3.1%) and chain store sales (-2.2% after -1.0%). Industrial production in August fell by 4.1% from July and 6.9% from a year earlier. Service-sector activity dropped 1.4% m/m and 2.3% y/y. The all-industry index, a supply-side composite monthly gauge of all activity fell 1.8% in August and was 0.6% lower in July-August than the 2Q level. Core private machinery orders, a leading indicator for business investment, had been expected to drop 3.0% in 3Q08 but were 9.6% lower in July-August than the second-quarter average level. Meanwhile, foreign machinery orders were 10.3% lower in July-August than in 2Q. With apologies to Bob Dylan, how many bad economic signs will it take for BOJ officials to realize that interest rates are too high?



Comments are closed.