Banzai! What's good for Japan... .
By Cheryl Strauss Einhorn
June 21, 1999
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.
|
