Sunday, June 21, 2015

Japan Economy Is In A Corner

Japan Lives And Dies On Exports!
Two interesting articles appeared in Japan Today on June 17th. The first titled, "Japan post y216 trade deficit in May" and the other "BOJ to debate weak yen." What converts into just under a 2 billion dollar trade deficit in May was a big improvement from the year before, but even a drop in energy imports was not enough to offset the less than spectacular exports of finished goods. To make the situation even more bleak was an automotive reliability study that showed Japanese cars falling in quality when compared to their competition and how they were trumped by Korea. Both Kia and Hyundia blew them out of the water, even American automobiles are faring much better. This could cut into the heart of their share of auto sales going forward. The perception of quality is a hard asset to put a value on, but has a big effect on sales.

Concern remains about the health of the Japanese economy, particularly that weak demand overseas could dent factory output as manufacturers try to cut an inventory buildup that boosted growth in the first quarter. The trade deficit narrowed in May, but the possibility of it moving back up in the second half of the year is very real as the weaker yen pushes up import costs. This moves us into the subject of the article about how Bank of Japan policymakers may be moving towards reviewing their weaker yen policy. It seems growing political concern over the weak yen policy is gaining traction, however consensus is that even as Greece moves nearer to defaulting on its debt BOJ officials will continue to be optimistic and stay the course of massive stimulus and monetary easing.

The BOJ’s 2% inflation target for later this year is a very important part of their economic program and while prices have yet to move they still have hope it will occur as momentum takes hold. Last week Governor Haruhiko Kuroda drove the yen sharply higher by telling parliament the currency’s real, effective rate was “already very weak.” After a bump up the yen again retreated when Government and BOJ officials came out saying the remark, while not a warning to yen bears, reflected growing concern voiced by politicians over the demerits of a weak yen, such as the pain inflicted on consumers through rising food prices. In recent parliament debates, lawmakers have urged Kuroda not to be hasty in trying to meet the inflation target and to hold off on more easing that could spur unwelcome yen falls. This is a big change from the days when the BOJ was under constant pressure to do more easing to help weaken the yen.

Many BOJ officials say the benefits of a weak yen still outweigh the downside, but some peope worry about the effect on consumption. Last year households quickly curbed spending when a sales tax hike raised the cost of living. The reality is the BOJ is in a difficult position because as time goes by results of their weak yen policy has yet to bring the prosperity many had hoped for while government debt has grown ever greater. At some point it will become clear that Japan has dug a hole that it cannot climb out of. The fact that Japan no longer runs a huge trade surplus is a key issue that must be factored in. Unlike Greece the people of Japan own much of their country's debt and the Japanese people will suffer in case of a default or when the debt is repaid with a severely depreciated or worthless yen.

Kuroda has said the BOJ is ready to act again if underlying trend inflation weakens, keeping alive market expectations of additional stimulus in October. “Just because a weak yen has been positive so far, that doesn’t mean that there will be more merit if the yen weakens further,” he said last week. Further monetary easing may be a tough sell to lawmakers growing wary of the costs of the radical monetary stimulus. This puts the BOJ is in a difficult position. Just like many central banks across the world that have tried to jump start their economies through stimulus programs rather than urging economic structural reforms they have distorted and delayed the economic landscape. The picture of Japan's future is both cloudy and complicated by the combination of its massive still growing national debt, an aging population, and their heavy reliance on exports.

Footnote; Thanks for reading as always your comments are encouraged.  Please check the archives for more articles that might be of interest to you. Another recent article concerning Japan can be found below.

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