Japan: Economic Decline Approaching Terminal Velocity
December 10, 2001
-great article about japan from northern trust. in spite of all this japan is up strongly tonight (over 3% right now) on better than expected Tankan results.-
Today's data releases underlined the fact that Japan is in deep trouble. We've been saying this for so long that it's getting repetitive - but the extent of Japan's woes is worth repeating, given that this is the world's second-largest economy, its biggest creditor, and a potential source of demand for many of its neighbors' exporters.
Here is what the data are telling us - and have been for some time.
Much of the corporate sector is hurting, afflicted by excess capacity, decreasing competitiveness, and too much debt. Core private sector machinery orders, an important gauge of capital spending, dropped a seasonally-adjusted 10.1% on the month in October to a 14-year low and plummeted 26.6% on the year. Overall orders were down a staggering 41.6% on the year, not surprisingly a record contraction. This is a very volatile data series, but the point here is that most analysts - including the government - had expected to see some recovery after core orders fell 13.2% on the month in September. The Cabinet Office coyly said that "there is a possibility that capital investment spending in the first half of next year will stay sluggish." No kidding.
The economy is trapped in a deflationary spiral and the banks have, in general, ceased to act as effective financial intermediaries. Once again, money supply grew in November - M2+CDs rose an annual 3.2%, vs. 3.0% in October - but wholesale prices fell 0.2% on the month and 1.4% on the year, the 14th consecutive month to see an annual decline. And, bank lending continues to fall, down 4.3% year-over-year, following a 4.1% contraction in October, and marking the 47th consecutive month of decline. In other words, there's a fair amount of liquidity "out there" in Japan, but it's just sitting in the financial markets, not moving into the real economy.
With interest rates stuck at zero for months, the banks not lending, and prices falling, some serious distortions are building in the financial markets. Just one example: the volume of the benchmark uncollateralised call money market hit a near-13 year low per day on average in November. This is Japan's key short-term market, but no-one wants to play anymore. It's just not worth it.
The Bank of Japan - or, at least, its Governor and many members of its monetary policy board - still doesn't get it. Governor Hayami said today that Japan had not yet entered a deflationary spiral and that the central bank would try to prevent such a crisis. The government issued a statement that "We hope the Bank of Japan will take into consideration the government's efforts and enact appropriate and flexible policies to fight deflation." The policy board meets next week. If they don't come up with something "appropriate and flexible" the financial sector will be in even deeper trouble.
We can expect more miserable economic data on Wednesday, with the release of the BoJ's quarterly "tankan" survey of business sentiment. The diffusion index for large manufacturers dropped from -16 in June to -33 in September. It will go lower, sparking more headlines about Japan's weak economic fundamentals (this is news?) and sending the yen lower.
Victoria Marklew
International Economist
northerntrust.com |
