Japan Update: Is the Recovery as Safe as BOJ Officials Claim?

June 20, 2012

Bank of Japan policymakers upgraded their assessment of the economy this month from seeing “evidence of a shift toward a pick-up” to the assertion that Japan indeed is “starting to pick up moderately.”  Positive comments were made about all components of domestic demand, and exports were said to be showing signs of picking up.  BOJ Governor Shirakawa identified the major risk factor in remarks today, which not surprisingly is the still undefused debt and banking crisis of Europe.  Mixed data and proposed shifts in Japanese energy   and tax policy create additional doubts that Japan’s recovery may not be sustained for long.  So do the last two decades of up and down economic growth.

Political scene:  Nuclear power is terribly unpopular in Japan, but an increased dependency on fossil fuel imports will exact a heavy toll on the nation’s trade and overall economic growth performance.  Japan’s government debt has ballooned to more than 200% of GDP, easily most among the G7 brotherhood, without so far lifting long-term interest rates because almost all of the debt is domestically held.  Also, mild deflation persists, and trend growth is weak.  Prime Minister Noda of the Democratic Party of Japan wants to double the 5% sales tax in two steps as the central reform of his deficit containment strategy.  This proposal is controversial both within the DPJ and opposition LDP.  Upper and lower house parliamentary elections are set for the summer of 2013, and an ill-advised sales tax hike in April 1997 that infamously clobbered the Japanese economy is not forgotten.  It will be hard for Noda to secure another term.  The ruling government meanwhile wants the Bank of Japan to take a more active role in ending deflation and sustaining economic growth.

Monetary Policy:  The institutional culture of the Bank of Japan is extremely conservative.  Chronically low short- and long-term interest rates reflect economic conditions, not a predisposition to promote growth at the risk of raising inflation.  The overnight uncollateralized interest has been zero to 0.1% since October 5, 2010 and has not exceeded 0.5% since September 1995, but an aggressive series of tightenings in 1989-90 was the immediate trigger of Japan’s two decades of malaise.  Japan was the first large economy with quantitative monetary easing in the 21st century, but officials abandoned such in 2006 before securing a sustainable defeat of deflation and only recently adopted an inflation, which at 1.0% is lower than formal or implicit targets used by other central banks.  The   The asset buying program was expanded in April by less than expected and by only half as much as in February.  Minutes from the May meeting released today projected economic recovery, unanimously decided not to ease further, and defend the current stance in which actions taken earlier have not yet delivered their full boost.

Economic Performance:  Today’s released Japanese data are not encouraging.  The all-industry monthly index, a supply-side proxy for GDP, edged up only 0.1% following declines of 0.7% in January, 0.1% in February and 0.3% in March.  April’s level was still 0.1% lower than the first-quarter average.  Customs trade figures for May revealed a JPY 907 billion deficit, 62% wider than analysts were anticipating.  The report included the first bilateral deficit in commerce with the EU since at least 1979, a 0.9% on-year drop in exports to that region and a 9.3% increase of total imports from a year ago.  Import volumes were 8.4% higher than in May 2011 compared to 12-month advances of 1.9% in April and 3.1% in the first quarter and 3.2% in 2011.  Looking ahead, support from net foreign demand will probably lessen because of the continuing struggles of Europe, slower growth in the United States and China, and the persistent strength of the yen, which is only 5% below last year’s all-time high against the dollar.  Real GDP growth of 4.7% annualized last quarter is unrepresentative.  More sober indications are the annualized pace of 0.9% over the last ten years and -0.2% per annum from 1Q97 to 1Q02.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


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