Bullish on Japan and commodites:
June 21, 1999
Banzai! What's good for Japan... .
By Cheryl Strauss Einhorn
Commodity prices may be bottoming, in part because low prices are proving their own best cure
for curtailing supply. But is there hope for higher prices, based upon the demand side of the
equation? Yes, says Anirvan Banerji, co-director of research at the Economic Cycle Research
Institute, "the Japanese economy has bottomed."
Certainly, the recent Japanese GDP number looked good -- surprisingly so -- at 1.9% growth for
the first quarter. And while it's likely that this estimate will be revised downward, a Japanese
comeback would be good news for the commodities markets.
The economically sensitive base metals could be among the beneficiaries. Historically, Japan has
consumed about 21% of the world's nickel, 14% of the tin and 13.5% of the aluminum produced
each year, according to CRU International. In addition, Japan is key to the health of the former
Asian Tigers, such as Indonesia and Thailand, where commodity consumption had been
aggressively growing.
Why does Banerji think that a Japanese recovery is under way? In part, because his institute's
Japanese Long Range Gauge, which is made up of indicators that anticipate cyclical turns by up to
a year, has turned up decisively. The index has now risen steadily for four months, and its
smoothed annualized growth rate has soared to 8.8%. The improvement is broad-based, driven by
every component of the gauge.
Among them: consumer sentiment, which just reached its highest level since the fourth quarter of
1996, and housing starts, which jumped to an 11-month high.
Banerji says that, in 1996's fourth quarter, the index correctly predicted Japan's economic
downturn. "Because the index's upturn now is pronounced, pervasive and moderately persistent, it
is clearly forecasting a business cycle upturn," he maintains.
He hastens to add, however, that this doesn't mean that Japan's structural problems have been
resolved. Most were present even before the current recession began. They didn't trigger the
recession, says Banerji, nor should a business cycle require their complete resolution.
Other leading indicators, which anticipate activity by a half-year, support the findings of the
Economic Cycle Research Institute Index. For instance, Japanese stock prices are moving higher,
which is consistent with an upturn in the business cycle. Japanese business failures have dropped,
falling to their best level in a decade. And machinery orders are at a 12-month high.
Other economic indicators are sending ambiguous -- but no longer negative -- signals. For
example, Japan's Index of Manufacturing Overtime Worked has risen above its November 1998
low. The Index of the Operating Rate of Manufacturing has hit a 13-month high and Non-Dwelling
Building Starts have jumped to an eight-month peak.
Hence, the movements of Japan's leading economic indicators are strongly, moderately or weakly
supportive of a business cycle upturn. None of the leading indicators are in a downturn any longer.
The final piece of the puzzle, coincident indicators, which show where the economy is now, are
mixed. Unemployment remains high; retail sales, weak. But industrial production is bouncing
back, as are wages and employment. The result: Here, too, the worst appears to be over. If the
Japanese recovery is for real, commodity price growth may be, too.
KEY COMMODITY INDEXES
CRB Group Indexes
6/18
6/11
Yr. Ago
CRB Futures
190.30
192.87
212.83
Industrials
171.42
174.79
216.87
Grain/Oils
162.61
164.43
187.11
Livestock
218.95
224.13
231.36
Energy
182.22
183.64
152.87
Precious Metals
223.89
228.83
237.79
Barron's ~ Bridge Telerate
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