It’s misleading to compare macroeconomic aggregates across countries with very different population growth rates, which is why so many analysts get it wrong on Japan. While we were doing some of the data work for that previous post, however, we thought you might appreciate a visualization of how Japan’s population has aged and why it is poised to shrink a lot over the next few decades:
One of the supposed “lessons” of Japan’s post-bubble experience is that steady grinding deflation is the worst fate that can befall a rich country. See, for example, Ben Bernanke’s classic speech from November, 2002, or this scary-looking visual from Nomura:
Commentators, academics and policymakers often assert that Japan’s economic performance since the 1980s is one of the worst fates a rich country can endure. While this has become somewhat less common since 2008 — Paul Krugman even apologized for his earlier criticisms — concerns about the “Japanification” of the euro area have become particularly intense as inflation has slowed and government bond yields have converged towards zero.
In a new note, economists at Nomura suggest that Europeans should only be so lucky. After all, Japan endured its supposedly “lost decades” with grace. The euro area has not, and things could end up getting even worse.
Before we dig into the meat of their arguments in a follow-up post, we can’t stress enough how important it is to adjust aggregate economic data for demographic differences. Read more
The best way to get less of something is to tax it, so nobody should have been surprised when Japanese GDP cratered after the sales tax was raised from 5 per cent to 8 per cent in April.
What the government didn’t expect, and what is encouraging Prime Minister Abe to delay (if not renege on) the plan to raise the tax rate to 10 per cent, was the economy’s failure to snap back. For example, the latest data show that real household consumption, excluding imputed rent, plunged by 3.5 per cent over the past 12 months to its lowest level since the Tohoku earthquake hit in 2011:
Earlier on Friday, we noted that one of the most interesting things coming out of Japan on the day was the rumour that the government was about to approve new allocation targets for the world’s largest pension fund, Japan’s Government Pension Investment Fund (GPIF), which would increase its exposure to domestic stocks.
That rumour has now been confirmed.
As Richard Kaye, portfolio manager at the Comgest Growth Japan fund noted, in terms of importance, this far outweighs the BoJ’s decision to raise the monetary base by around Y80tn a year from Y60-70tn and to triple annual purchases of ETFs and REITS. Read more
Since we can’t put charts in the Cut without borking format for a bunch of readers, here’s what a surprise commitment from the Bank of Japan to raising the monetary base by around Y80tn a year from Y60-70tn, a tripling of annual purchases of ETFs and REITS, and a certain (probably coordinated) GPIF rumour doing the rounds will do to Japanese equities and the yen.
More on the GPIF rumour and the positive and negatives of this latest Kuroda splurge near the bottom.
The Bank of Japan has bought bonds, bills, stocks and property since embarking on its radical monetary easing programme last April.
Now it’s buying time. Read more
When governor Haruhiko Kuroda stood up in April 2013 to set out a bold new regime of monetary easing at the Bank of Japan, the executive summary seemed obvious: it’s all about the number two.
In vowing to double the monetary base by doubling the maturity of the bonds it buys, the BoJ said it would hit an inflation target of about 2 per cent “at the earliest possible time, with a time horizon of about two years.”
The bank then produced targets for base money and its own balance-sheet holdings for the end of the 2013 and the 2014 calendar years (click to enlarge): Read more
A recent speech by Reserve Bank of Australia boss Glenn Stevens contained this striking chart:
Russia’s ESPO crude blend determines the key compensation rate for Russian oil production.
As analysts at JBC Energy note on Monday, however, the crude now trades at its weakest differential to Dubai crude — the benchmark it is most commonly compared to — since it became an established blend on the market in 2010.
Whilst the analysts are quick to point out that there are legitimate fundamental reasons for the weakness, it should not go unnoticed that some regular ESPO customers seem to be missing from the market. Read more
Japan raised its consumption tax rate by 3 percentage points back in April. Unsurprisingly, spending jumped in the few months before the hike and then plummeted when households were forced to bear higher costs with unchanged incomes.
It’s hard to determine the magnitude of the damage this early, but one interesting test is to compare this tax hike to the previous rate increase in 1997, which is often blamed for pushing the country back into recession. (The coincident timing with the Asian financial crisis certainly didn’t help.) Read more
Been a little while since we checked in on Japan and Abenomics but this from Credit Suisse on Abe’s plan to cut the effective corporate tax rate, from more than 35 per cent to “somewhere in the 20s [per cent] within several years”, is worth a look.
The move itself is no real surprise but the potential seigniorage element is further proof of the reliant, intertwined, parent-subsidiary, nature of the Bank of Japan’s relationship with the Abe government. From CS’s Hiromichi Shirakawa and Takashi Shiono: Read more
Following Izzy’s charts from Credit Suisse, here’s an update of my favourite measure of how Europe’s turning Japanese.
This chart shows eurozone inflation since the region’s crisis against Japanese inflation from the bursting of its bubble. The offset puts the peak of 1990 where the eurozone was in 2011, when the US near-default started a panic which threatened the survival of the euro. Read more
If you were a Japanese prime minister intent on being radical (where it’s practical) and you had the world’s second largest public pension reserve fund refusing to switch out of domestic bonds and into riskier assets as aggressively as you’d prefer it to…
You too might consider shaking things up. Read more
Correlation, causation, or Rorschach test we’re not sure, but the latest from BoA ML strategist Michael Harnett leads with a quite remarkable chart.
In addition to John Authers… please welcome James Mackintosh, the FT’s Investment Editor, as an Alphaville blogger. Like John, James has written for us before, on everything from fair value accounting to EM hot money.
Economists have been worrying about Europe turning Japanese. Investors seem to be more concerned about Japan turning European: for the first time since IBES started compiling forward price/earnings ratios in the 1980s, Japan is cheaper on this widely-used measure than Europe (as this chart shows): Read more
If these are Abe’s yakuza tactics, they’re a bit disappointing. Should still be fun to watch though.
From The Japan Times:
On Thursday, trade minister Toshimitsu Motegi said his office would publish the outcome of the labor talks known as “shunto,” meaning [unions'] “spring offensive,” and reveal which members of Japan Inc. heeded the wage-hike call issued by Abe.
“The ministry plans to conduct a survey on the leading 1,800 companies about this year’s shunto talks and disclose the results at latest by May,” Motegi, head of the ministry of economy, trade and industry, told a Diet committee.
That shows 94 per cent of analyst from Bloomberg’s monthly survey expecting more QE from the BoJ, be it this quarter or not. There’s “priced in” and then there’s maybe over-priced in… Read more
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: Read more
Big declines for the Japanese benchmarks, with the Nikkei 225 rapidly approaching 14,000 from the wrong direction to leave it and the broader Topix firmly in correction territory.
There are reasons aplenty. Japan vied with Portugal for most go-go market last year, Chinese growth appears to be slowing, the US had a bad day, and then there is the whole taper-related, Turkey-inspired return of general angst.
Still, momentum watchers may have reason to be concerned by the following chart: Read more
Consider this chart from Morgan Stanley:
And then this from Barc: Read more
It’s well known that Japanese society is ageing, rapidly. Here’s the trend charted, by Nomura’s Kyoichiro Shigemura. Click to enlarge,
In advance of Japan’s GDP figure later in the week, have some 3rd arrow pessimism from S&P’s Paul Sheard who, while reasonably fine with the first two of Shinzo Abe’s missiles, is deeply underwhelmed with what passes for a “growth strategy” these days (with our emphasis):
Why the disappointment then? Probably for three related reasons, all of which reinforce the sense that, when it comes to the growth strategy, it is more a case of “business as usual” than that something truly game-changing is afoot.
Shinzo Abe has a problem.
As the FT’s Jonathan Soble noted last week, part of what appears to have persuaded Abe to press ahead raising the sales tax to 8 per cent from 5 per cent next April was the “the risk that delaying would scare investors by making the government appear unwilling or unable to tackle the debt”. Read more
Cardiff has already written a long’un on this and we hate to keep banging on about such a muddy topic but Credit Suisse have a handy reminder out about the immigration issue in Japan which is worth a read:
An interesting aside to the consumption tax argument from BNP Paribas’ Ryutaro Kono — why have JGB markets been so calm? It was only recently that their flighty side was being discussed. So why has there been so little reaction to reports that Abe et al might change the timing or scale of the consumption tax? Read more
Check it, from JP Morgan’s Flows & Liquidity team:
The 233 repo fails in the month of June is four times larger than the typical monthly pace of 60-70 and the trend is quite suggestive. (A fail is where one market party fails to deliver the security or cash it had promised to send to another entity within a specific time frame. It’s a problem for both buyers and sellers since it means they could have to go and buy them out in the open market for what could be a higher or lower price.)
From JPM, with their emphasis: Read more
This is is a guest post from Philip Pilkington, a writer and research assistant at Kingston University.
Well, it seems that everyone is talking about Japan’s Shinzo Abe’s so-called “Fourth Arrow” in his economic recovery program. That is, a plan to raise the consumption tax to eight per cent next year followed by a hike to ten per cent in October 2015. Can we tell anything about the likely consequences of such a move from Japan’s rather colourful macroeconomic history of the past twenty years? Yes, we can. Read more
The first bits of post-Abenomics data are finally trickling in. And so far, it has to be said, it’s looking good for Shinzo Abe.
Lombard Street Research’s Michael Taylor takes us through the initial findings (our emphasis):
A recovery in industrial production and consumer spending points to above-trend growth in Q2. Consumer price inflation may soon make a brief appearance above zero on the back of higher energy and import prices. But deflation isn’t beaten yet. The splurge of Japanese data overnight confirms the overall positive trend in the economy. Notably, industrial production increased by 2% in the month of May, the fourth consecutive monthly increase. Output in May was boosted by electronic components and machinery in particular. Both industrial production and exports are now on an upward trend (see chart below). To a large extent this recovery is due to the weaker yen. Although the yen is above its recent lows against the US dollar, it is still 19% lower than last November.