The Japanese economy has made a weak start to 2016 and to the final quarter of the Japanese financial year which ends today.
Figures out yesterday revealed that Japanese industrial output took a tumble in February, contracting by the most since the 2011 tsunami.
That is important for Australia as Japan remains our second biggest export market and the weak production data is telling us there’s little real growth in demand for many products using Australian exports such as coal, LNG, iron ore and the like.
That is on top of weak inflation, retail sales (though household spending was stronger in February), still strong employment, but there’s little wage growth, while a very strong current account and reserves position is helping boost the yen at a time when it is supposed to be sharply lower and boosting exports and the economic recovery.
It’s not and the yen is now around the levels it was when the Bank of Japan launched its quantitative easing three years ago next month.
However the economy seems to be staggering towards another hit of spending by the Bank of Japan in its increasingly futile efforts to kick start growth and activity generally.
Industrial production slumped 6.2% month-on-month in February, down from a 3.7% rise in January, and market forecasts for a fall of 5.9%.
It was the biggest contraction in output since March 2011, the month of the earthquake and tsunami, when production plunged 16.5% and dragged the economy into recession.
Production fell minus 1.5% in February from the same month in 2015, better than the 3.8% annual fall contraction in January, which was the steepest decline since May of last year.
The Bank of Japan, in its recent monetary policy statements, has described industrial production as having “continued to be more or less flat”, but the central bank also said that “sluggishness” in the outlook for exports and production is likely to remain. That is due to the weak level of growth globally, but especially in China and the rest of Asia.
Economists will be closely watching the Tankan survey of large manufacturers, due out tomorrow for any signs of an improvement in the sales and investment expectations for businesses.
On the day that Japanese retail sales in February posted their biggest monthly contraction since April 2014 (when the government raised the sales tax for the first time 17 years from 5% to 8%), comes news that the tax will rise by another 2% this October.
Figures released on Tuesday showed retail sales fell 2.3% month-on-month last month, down from a revised 0.4% fall (previously a fall 1.1%) in January.
The 2% increase was supposed to happen in October of last year but was postponed by the government as growth struggled.
The April 2014 increase saw a 13.4% slump in retail sales in May of that year and the economy has struggled to regain its growth momentum since, leading the Bank of Japan to cut interest rates to negative levels and expand its huge quantitative easing program. In fact that program has basically flopped if the retail sales data are any guide, not to mention inflation, which refuses to move very far from zero.
Prime Minister Abe revealed his intention to lift the tax this year on Tuesday when the parliament approved Japan’s biggest ever national budget of $US820 billion. Mr Abe gave himself an out by saying the rise would go ahead “unless there is a shock to the economy on the scale of the Lehman crisis or a massive earthquake".
And in a commentary yesterday, the National Australia Bank yesterday described the Japanese economy as “an economy struggling to generate any momentum”.
In a note economists at the bank pointed to the mixed nature of the data from Japan – weak growth with quarter on quarter growth falling 0.3% in the three months to December (but being up 0.8% from the same three months in 2014).
"Consumption has been weak given the strength in employment, generally solid consumer confidence and low inflation due to falling commodity prices. This suggests some upside ahead, but the fall in consumer confidence in February is a concern.
"Business investment continues to trend up, but exporters are struggling in the face of global economy weakness and, more recently, Yen appreciation. A support for business investment has come from corporate profits, which rose by 7.5% in 2015 to a record ¥70.8 trillion, although they started to turn down at the end of 2015.
"The main bright spot is the labour market. Labour market conditions remain tight, with the unemployment rate at a low 3.3%. Nominal cash earnings, though, have only increased modestly. The outlook is for modest increases in wages, as corporations such as Toyota have pared back their wage increases from those of recent years
"Progress towards the Bank of Japan’s (BOJ’s) inflation target has stalled, and inflation is unlikely to reach the BOJ’s 2% inflation target under current policy settings. Given this, the lack of economic momentum, recent Yen appreciation and falls in equity values since mid-2015, we expect the Bank of Japan to decide on a significant monetary easing at its April 2016 meeting.
“This will likely include expanded QE, a further cut to deposit rates and something akin to the ECB’s financing programs for banks, which allows banks to access funding at a rate as low as the negative deposit rate.
“Japan’s current account surplus surged to ¥16.64 trillion in 2015, driven by record tourist arrivals, weak crude prices and earnings from overseas investments.
“Japan’s very strong external position has cemented its safe haven status, resulting in the sharp recent appreciation in the Yen – despite the negative interest rate policy. The stronger currency has weakened Japan’s equity markets, with the Nikkei 225 declining close to 20% since its peak. The launch of the BOJ’s negative interest rate policy has elevated volatility in the Japanese Government bond market,” the NAB economists wrote.
