Will Japan’s second quarter slowdown prove to be a one quarter wonder?
After a sharp, 8% recovery in exports in July, from June’s slump (the first in five years), anything is possible as exports are a good indicator for overall performance.
Just as importantly, the July figures showed that China replaced the US as Japan largest customer.
A month is not indicative of a trend, but it is noticeable that the solid rebound in July came after several months of a slowing trend in Japan’s export performance.
On top of that the destabilising influence of soaring oil prices has eased: the $US33 a drop in world prices in just over a month will have a positive impact in Japan, especially if it’s sustained.
But the surge overnight past $US121 a barrel has cut the fall to $US27 a barrel and holds out the possibility of another destabilising rise for the economy (and all economies).
Japan’s Finance Ministry reported yesterday that exports rose 8.1% in July, compared with July 2007.
Exports to China soared 16.8%, while shipments to the US slumped 11.5%, the 11th successive month that they have declined.
The answer isn’t hard to find about the slump to the US: lower shipments of cars, consumer and capital goods, whereas the rise to China has come from cars, capital goods, but not as many consumer goods.
The surge in oil prices however was again noticeable in July as it caused the country’s import bill hit a record last month: that in turn caused the trade surplus to contract 87%.
Imports jumped 18%, the fastest pace in two years. The trade surplus fell to only 91.1 billion yen (or around $US830 million, sharply down from a year ago).
Economists cautioned that China won’t be enough to offset slowing demand from elsewhere, but with the US dollar rising strongly, Japanese companies will have some leeway in competing against US groups.
Exports to China rose to a record 1.29 trillion yen, exceeding the value of those sent to the US for the first time since the government began compiling monthly figures in 1950.
And, if China is buying a lot of Japanese exports ahead of the Olympics, is that a sign of companies’ forward ordering to avoid disruption during the games? Or is it a genuine upturn in demand?
If sustained for another couple of months, a pick up in Chinese demand for Japanese exports would be a solid signal that the Chinese economy is doing well and not slowing, as many foreign analysts fear.
But it wasn’t a one market wonder: exports to Asia rose 12.7%, the highest ever, and exports to Europe rose for the first time in three months, up 4.1%.
That was a month when activity in Europe contracted after the continent’s second quarter contraction in growth, with Germany, Italy and France leading the way down.
The Bank of Japan this week described the country’s growth as "sluggish” for the first time in a decade, and blamed weakening exports as well as higher commodity costs (Besides oil and gas, coal iron ore, manganese, copper and many foodstuffs have risen sharply in price in Japan this year).
The sluggish export performance in the second quarter helped push the Japanese economy into a slowdown in the second quarter, with growth off 0.6% from the first quarter’s rise of 0.8%.
The biggest drop in exports for seven years caused the economy to shrink at an annual 2.4 % rate last quarter, robbing Japan of the main driver of its longest postwar expansion.
But Japanese companies are showing their usual ability to move quickly: the giant heavy equipment group, Komatsu, reported last month that Chinese sales rose 37% in the second quarter, while revenue in North and South America slid 2.8%.
Many economies in Asia have been battered by high inflation, oil prices and rising prices of food: interest rates have risen across the region in India, Vietnam, the Philippines, South Korea and Indonesia
The Bank of Japan said in its update this week that: "Growth in exports is expected to remain only modest for the time being, due to the slowdown in overseas economies,” but it added that growth will start to pick up as commodity prices "level out” and the global economy recovers. Led by oil, commodity prices have certainly settled.
The assessment of the economy from the central bank saw it downgrade Japanese economic prospects for a second month in a row.
That was taken as a sign that the global slump sparked by the US credit crisis may be spreading too quickly for Japan to avert recession.
”Economic growth has been sluggish against the backdrop of high energy and material prices and weaker growth in exports,” the central bank said in a statement on Tuesday, after leaving official interest rates steady at 0.50%.
Part of that assessment was the slowdown in exports to Asian markets in June, which was reversed in July.
Industrial output had fallen for two straight quarters, but if July’s rise in exports is followed by signs of improvement in Japanese industrial output (and in things like machine tool orders) then that second quarter slowdown might prove to have been a one -off, much in the way that the slump in the US economy in the December quarter of 2007 has so far proved to be a one-off.
That’s not to say that Japan will rebound quickly: the higher commodity and food costs are still a big depressant.
But with corporate Japan in far better shape than the 2001 recession and far more aggressive about chasing new markets, don’t be surprised if we start reading later in the year an old story: how Japanese economic growth is being led by solid exports.
Even after the second quarter slowdown, it has to be said that Japan’s economy is better placed to ride out the slowdown.
Its banks are much healthier than those in he US and Europe, it is still benefiting from an export boom to the rest of Asia; and des
