The numbers out of Japan have been getting steadily more awful over the past year. As Lex noted last week, economic destruction in Japan is “assuming Godzilla-like proportions”.Industrial production fell almost 10 per cent in December compared with November. That’s a big number but it gets worse. The government re-did its forecasts for January to a 9 per cent drop, and February down another 5 per cent. In all, that knocks almost a third off output since September, putting it back, as Macquarie notes, at 1983 levels.
In other words, it took a quarter of a century to reach levels that were unwound in the space of five months. For carmakers, it is even worse: production may halve from last year.
According to long-time Japan-watcher Frank Veneroso, the “land of the rising sun apparently risks falling off the face of the earth”. In a brief summary of Veneroso’s grim paper, Yves Smith at NakedCapitalism says:
1)The Japanese industrial production data and METI forecast was bad beyond all imagining. Industrial production might fall by 1/3 in the 12 months ending in January. It could fall in a mere four months between November and February by more than half the U.S. Great Depression decline which took almost four years.2) Nothing like this has ever happened to a major industrial nation to my knowledge – not even during the 1929 – 1933 Great Contraction.
3) The trade weighted yen is by far the strongest currency in the world. Japan is losing competitiveness fast. Given the lags in trade matters will get worse.
4) The insane trader community continues to push the yen up as a safe haven. It is all so detached from reality I suppose they could take it higher.
“I have been writing about an Asian black hole for almost two months now”, adds Smith:I have been crying from the rooftops about an emerging depression in Japan. It has been as though a neutron bomb had gone off in the world. There was no one who seemed to notice, no one who seemed to listen. Every week it gets worse and worse and worse. Today it was Japan….
THERE HAS NEVER BEEN DATA THIS BAD FOR ANY MAJOR ECONOMY — EVEN IN THE GREAT DEPRESSION. December industrial production came in down 9.6%, worse than the METI [Ministry of Economy, Trade and Industry) forecast. It is now down almost 21% year over year. METI forecasts a further 4.7% decline in February. The inventory to production ratio soared again. Maybe METI will be correct.
If it is, Japan industrial production will have fallen 28% (non annualized) in four months. It will have fallen by a third in about a year. Nothing in the history of major nations compares. A 28% decline in four months would be more than half of the entire decline in US industrial production over the 3 years and nine months of the US Great Depression. It would be a greater decline in four months than in any 12 month period in the Great Depression in the US. We are literally looking at the unimaginable.
IT'S A DEPRESSION IN JAPAN -- ALREADY -- PURE AND SIMPLE.
The happy tones of Frank and Yves are undoubtedly resonating in the austere halls of the Bank of Japan and the vast administrative district of Kasumigaseki.
The world has bitched and moaned about Japan's refusal to act to stimulate its economy, and its seeming inability to take meaningful action on combating the global financial crisis.
But the latest series of ghastly figures, including the record 35 per cent plunge in exports in December and serious downgrades to economic forecasts -- from incremental growth to contraction - in the past few weeks, has goaded the bureaucrats and policymakers into damage-limitation overdrive.
Fuelling their concerns is a collapse in global demand that has seen huge hits taken by big Japanese manufacturers, which have announced gob-smackingly sweeping cut-backs in jobs and production -- from Sony (at least 16,000 jobs) and Toyota (at least 6,000 jobs in Japan alone) to Hitachi, which last week projected a record Y700bn annual loss ($7.8bn) and said it may eliminate 7,000 jobs.
So now, the government has reeled out a series of extraordinary measures including -- on Tuesday -- the announcement that the Bank of Japan will buy Y1,000bn ($11.1bn) of shares owned by financial institutions to shore up their capital, encourage them to lend and basically try to boost liquidity in the battered system.
That follows earlier - and increasingly desperate - measures including the BoJ's decision late January to begin buying corporate bonds, and bonds issued by real-estate investment trusts.
And that step came after the central bank warned the economy faced two years of contraction and deflation as it moved to ease the strain on businesses strapped for funds. The BoJ forecast a contraction of 1.8 per cent for the year ending March 31 and of 2 per cent for the following fiscal year. Its previous assessment, in October, projected growth of 0.1 per cent this year followed by 0.6 per cent next year.
As figures showed exports declined by a record 35 per cent in December, the central bank kept its benchmark interest rate on hold at 0.1 per cent in late January but said it would buy Y3,000bn ($34bn) in commercial paper until the end of March.
Even the usually understated Masaaki Shirakawa, BoJ governor, was moved to warn: "The outlook for the Japanese economy has deteriorated dramatically and there is a high probability that it will continue to do so".
Under its latest plan, reports Bloomberg on Tuesday, the BoJ said it will buy stocks of companies with a credit rating of BBB- and higher. To be eligible, banks will need stockholdings exceeding Y500bn and a "capital adequacy ratio based on international standards," it said. The bank will only buy up to Y250bn in stocks from each lender.
Japan's six biggest banks hold about Y11,000bn of shares by book value, and plans to buy less than a tenth of that amount would do little to strengthen their finances, according to Bloomberg, which quoted Hideo Kumano, chief economist at Dai-Ichi Life Research Institute, saying: "It's questionable whether this stock-buying program will improve banks' capital adequacy ratios".
The bank's Y1,000bn can buy less than 0.4 percent of the value of companies in the Topix, or 0.6 percent of the value of stocks in the Nikkei, according to Bloomberg data.
Many western institutional investors remain sceptical of the efficacy of such measures. As Diane Lin, a portfolio manager at Pengana Capital, told Bloomberg: "It doesn't really solve the fundamental problem; the fundamental problem is how much the earnings are being damaged... [the economic data last week] was a total shock to us.”
One more key point, as Veneroso points out, while Japan “apparently risks falling off the face of the earth”, nonetheless, the Japanese yen soars.
We hear the ludicrous mantra from all the investment banks and all of their speculator clients that the yen is a safe haven amidst the global chaos.
To my mind the real reason why the yen soars is because it soars. Except for a brief interlude in the mid 1990s the Japanese yen has been bounded on the upside by a ROUND NUMBER – Y100 to the dollar. It bumped against the ceiling time and again. In recent months the unwinding of massive yen-financed carry trades caused a powerful, though transitory, impetus on the part of yen debtors to panic purchase yen. This impetus broke the yen through its magic barrier of 100. Since everyone now ignores fundamentals and only looks at the witchcraft of charts and technical tools they now all have the next technical objective of 79 yen to the dollar on the brain. That was the spike high in the yen in that brief mid 1990s foray above the great ROUND NUMBER of 100. In my judgment it is this chart objective on the brain that explains yen strength today now that most of the panic buying by yen carry traders has abated.
Smith rightly notes that Veneroso does omit a couple of factors:
First, that Japanese banks, unlike their US, UK, and Euro counterparts, have almost no exposure to the Anglo-Saxon debt binge. But they have their own issues. Japanese banks still have significant holdings of industrial companies. Under Basel rules, they can count 50% of market value as equity. Japanese stocks and the yen tend to move inversely, and the yen at current levels or higher has pushed the Nikkei to levels that make bank capital look less than solid. And now that the industrial side of the economy is falling off a cliff, the Nikkei is unlikely to soon even if the yen were to fall a fair bit.
Second, with Japan at tantamount to zero rates, its currency is not vulnerable to depreciation due to short-term interest rate cuts, which in theory makes it appealing.
Overall, though, Veneroso sounds a chillingly realistic warning. We can only agree with Smith, who says: “One can only hope Veneroso is wrong, but it seems likely that the (considerable) damage of an overly high yen is already done.”
A last word here goes to another veteran Japan-watcher Peter Tasker who, in a recent note for Dresdner Kleinwort, (“Breaking the double suicide pact: Time for a change in Japan’s macro-policy settings”) predicted that Japan will have no choice but to change its macro policy framework, as the costs of not doing so become more apparent.
Japan’s policy-makers have “never been serious about delivering a sustainable consumer recovery”. They have never needed to be as long as the export sector remained in good health – as it did through most of the post-bubble era, thanks to good growth in major export markets and a progressively undervalued real yen, he notes.
Well, it’s “game over” for that strategy, he concludes. Not because of the Japanese domestic context, which would be unlikely to trigger change on its own, but because Japan’s key trading partners will demand change in the terms of the bargain.
He uses the Aesopian metaphor of grasshoppers (the “debt-addled, bubbled-out, current account deficit countries” — like the US) and ants (the “current account surplus countries who barely participated in the great leverage party” — like Japan), noting that the two species “have been involved in a double suicide pact”.The relationship between the grasshopper and ant economies is similar to the situation in the mid-1980s, though the imbalances that caused such political heat then were small beer by today’s standards.
If Japan wants to head off a similar debacle — and help itself in the process - it needs to do its share to shore up the chronic deficiency of global demand. Which means reversing the tightening bias that has been a constant of economic policy making for the past 12 cyears.
See a summary of “The Ant and the Grasshopper” at the Asian Eye table in the Long Room.