The recent economic news out of Japan hasn’t been encouraging.
The FT’s Jonathan Soble writes that export growth in particular has disappointed given the decline in the yen, and accounted for much of the shortfall in Monday’s release of Q4 GDP:
External trade was the weak point: a softer yen has done little to spur more exports even as it has sharply increased the cost of imported energy, helping turn Japan’s once vaunted trade surpluses into large and growing deficits. …
Monday’s data showed that home purchases – a focus of the pre-tax-rise rush – were up 4.2 per cent from the previous quarter. Consumer spending increased 0.5 per cent, capital investment by companies rose by 1.3 per cent and government spending also increased, though at a slower pace than in the previous period.
But a small increase in the value of exports, at 0.4 per cent, was not nearly enough to offset a 3.5 per cent surge in imports, leaving trade as a net negative for the economy.
Lily Kuo of Quartz adds:
Government data shows that overall household spending grew only 0.5% from the quarter before—well below the 0.7% increase expected by economists. That’s the result of rising costs for food and especially fuel, which has to be imported, and weak wages that haven’t kept up with the country’s still-modest inflation. Japanese consumer confidence in December was 41.3, below the 50 mark that separates consumer pessimism from optimism. Moreover, a lift in stocks has done little to help Japanese families—shares and equities only account for about 8.5% of financial assets (pdf) held by Japanese households, compared to 32.7% in the US.
The GDP report came before the BoJ announced that it would leave its current QQE (quantitative and quantitative easing) policy unchanged while bolstering a loan program for banks that economists consider to be mainly symbolic. Given the forthcoming rise in the sales tax, the unexpectedly large hit to domestic demand has been especially worrying.
Not all of the news has been bad. Business investment was a relative bright spot in the report, growing faster than its pace in Q3. The economy appears to have started reorienting itself, away from its emphasis on cars and electronic manufacturing and towards the transportation and retail sectors.
An FT editorial asserts that the success of Abenomics now hinges on higher wages and structural reforms. The latter item, which represents the third arrow of Abenomics, remains a tremendous challenge because of the threat to an entrenched Japanese societal model that such reforms represent. Public resistance to meaningful changes is likely to remain strong.
Yet there is actually some hope that wages will soon begin to grow. In fact, nominal wage growth hasn’t been bad; it just hasn’t kept pace with inflation. But the ways in which Japanese monetary policy, inflation and relationship expectations, and the labour market interact with each other are complicated and unclear — and they remain a point of fascination for us.
Specifically, the fact that inflation is leading nominal wages rather than being driven by them doesn’t necessarily mean that monetary policy is counterproductive or failing — not if the decline in expected real wages is also helping to clear the labour market. We still don’t know if that’s what is happening. And on this point, we come to a recent note from Bank of America Merrill Lynch on Japanese employment, a topic that doesn’t get enough attention in most discussions of Japanese economic reflation.
An extended excerpt follows, but the main point is that Japanese unemployment continues to fall quickly down towards the country’s estimated NAIRU — even as labour force participation has been trending up since 2012.
Companies are understandably cautious about paying more in wages given the oncoming sales tax hike and the uncertain outlook for longer-term reforms. Perhaps they doubt the sustainability of the recent reflation, worrying that it was the result of one-off climb due to the weakened yen — which is also why they have enjoyed high corporate profits this past year. The employment gains to this point have included a heavy concentration in part-time work.
Still, if the labour market does continue tightening, then the outlook for wage growth will only continue to improve — especially if the Bank of Japan signals its tolerance for the resulting inflation or, better yet, takes further easing steps. And in such an environment, structural reforms of the kind necessary to boost Japan’s long-term growth potential would be (at least marginally) easier.
It’s far too early to count on any of this happening, but it’s also too early to declare that Abenomics isn’t working.
Japan’s unemployment rate improved to 3.7% in December. This is the rate’s lowest level since December 2007, a time that coincided with positive year-on year changes in the CPI (core, excluding fresh food) and nominal wages (total cash earnings). The 2013 average unemployment rate of 4.0% marked a 0.3ppt improvement on 2012. Maintaining this trend in 2014 would go a long way toward ensuring Japan’s breakaway from deflation. We estimate 2014 unemployment using different scenarios based on recent developments in the rate’s two determinants – changes in the number of employed and the labor participation rate (labor force/working-age population, defined as age 15 and over).
In 2013, the number of employed rose for the first time since 2007, climbing by 0.7% yoy. The number employed grew faster (about 1.0%), but the number of self-employed continued declining, slowing the overall employment growth. If this annual change were averaged over the four quarters of 2013, the number of employed persons would have grown about 0.2% each quarter. In this estimate, we assume that the current economic recovery continues in 2014. As the output gap narrows and the labor market tightens, the number of employed persons continues to trend upward at a steady rate of 0.2% qoq.
The most important factor in the unemployment rate outlook is the view of the labor participation rate. Until the Lehman crisis in 2008, the labor participation rate was above 60%, but in December 2012 it sank to 58.9%, before swiftly recovering to 59.5% in December 2013. The recent rise of the labor participation rate reflects the fact that economic recovery has encouraged people to resume job searches and thus be counted as part of the labor force. In the early stage of an economic recovery, however, employment growth is only modest, so the rise of the labor participation rate (= increase in the labor force) slows the unemployment rate’s decline. For example, if the labor participation rate were still at its 2012 average (59.1%), the unemployment rate would have declined to 3.2% in 4Q 2013. This means the rise of the labor participation rate effectively added 0.7ppt to the unemployment rate, because the actual unemployment rate in 4Q 2013 was 3.9%.
An interesting feature of recent data is that male and female labor participation rates are behaving in completely different ways. The overall rate hit bottom at the end of 2012. Among men, however, the labor participation rate has declined in an unbroken line from 2008. Very recently, the economic recovery effect (spurring people to resume job searches) has slowed the decline of the male labor participation rate, but we believe the decline reflects the withdrawal from the labor force through conventional retirement at age 65 of the early baby boomers born in 1947-1949. In other words, the aging of Japan’s population is the main factor behind this labor participation rate’s decline.
On the other hand, the female labor participation rate trended increasingly upward from the beginning of 2013, climbing 0.7ppt yoy. This cancelled out the decline of the male rate and lifted the overall labor participation rate. In 4Q, female labor force participation reached 49.4%, thus returning to its 1990s level of around 50%. The main factor behind the rise of the female rate has probably been economic recovery, resulting in more employment opportunities. In addition, we cannot rule out the possibility that as male baby boomers have retired and reduced the labor supply, women have started to compensate for some of the decline by supplying new labor. This trend appears to have staying power.