28th December 2011 by Shaun Richards
As much of the Western word returns back to work after the Christmas break it sees news from a country which does not celebrate at this time of year. The land of the rising sun has not only given us new economic news but also several factors to consider in its planned budget for the next fiscal year. However before I do I would like to take you back a year to December 30th 2010 when I considered the strength of the Japanese Yen.
Yen Currency Strength
Back then the Yen was at 81.5 versus the US dollar and as I type this it is now at 77.7 so in spite of the concerted central bank intervention after the tsunami in March and the more recent efforts by the Bank of Japan alone the Yen has risen by 4.6% against the US dollar in 2011. This comes on top of a rise from 93 to 81.5 in 2010. Against the Euro the Yen has been even stronger as it has risen by 6% from 108 to 101.6 as I type this.
Against the pound sterling the Yen has risen too although there is an implication for the performance of the pound in 2011 that it has fallen by the least against the Yen as it has only dropped from 126 to just under 122.
Japanese industrial production
Back on October 28th I discussed a worrying development in Japanese industrial production.
Industrial Production in September decreased 4.0% from the previous month, showing a decrease for the first time in six months. It showed a decrease of 4.0% from the previous year.
This was worrying partly because this is not what usually happens in an industrial powerhouse like Japan and also because after the problems created by the tsunami in March we were continuously being told that her economy was growing strongly. There was a recovery in October when seasonally adjusted industrial production grew by 2.2% and the September decline was revised down to -3.3%. However the fall in industrial production returned in November according to the Ministry of Economy Trade and Industry.
Industrial Production in November decreased 2.6% from the previous month, showing a decrease for the first time in second months. It showed a decrease of 4.0% from the previous year.
Back on October 28th I gave some context for these numbers by looking at the overall production figures.
If we look at the absolute numbers here where 2005 is a base level of 100 we see that the seasonally adjusted index for industrial production is 89.9 and for context this measure was at 93.7 in August and 93.2 in July.
That same seasonally adjusted index for industrial production is now 90.1. So not only has there been very little growth over the past two months but Japanese industrial production remains approximately 10% below what it was in 2005. Even the Ministry itself has changed from telling us this.
Industrial Production is on a recovery trend after the Great East Japan Earthquake.
Industrial Production appears to be flat
Japanese disinflation continues
Regular readers will be aware that falling prices have been a persistent feature of Japanese economic life during the period of the (two) lost decade(s). Such disinflation may be picking up again as shown by this figures from the Japanese Statistics Bureau.
The consumer price index for Japan in November 2011 was 99.4(2010=100), down 0.6% from the previous month, and down 0.5% over the year.
You may note the re-basing of the index to 100 in 2010. Usually countries do this to try to hide rises in prices whereas such a move in Japan would be to hide how long they have been falling. So we have another area where you need to metaphorically put up a mirror to Japan’s economy to relate it to most Western ones.
But it is not true that no prices rise in Japan and we need to remember that price indices are some form of average. If we look deeper into the numbers we see that fuel light and water charges have risen by 4.9% over the past year. So we see that Japan has not completely avoided the effects of the commodity price boom and we also see that other prices must have fallen faster than the overall index.
There is food for thought here for the Bank of England and its policies as Japan has combined for a long period something it is terrified of , falling prices, with something it wants, export success, for a long time.
Consumption is weak too
Japan produces several measures of consumption but here as an example are her average figures.
The average of consumption expenditures was 295,066 yen, down 4.7% in nominal terms and down 4.1% in real terms from the previous year.
Not entirely reassuring is it? Also as I have pointed out many times before weak consumption figures have been a feature of the lost decade experience. If we look at the underlying index for consumption for two or more person households it is at 96.3 where 2010 is 100. The figures are usually strong in December but there is some catching up to do merely to get back to 2010 levels. Indeed as I compared this year to past years I had to go back to 1986 to find a weaker underlying index number for November.
These numbers show that after the surge in economic growth in the third quarter of 2011 (1.5%) there are much harder economic headwinds for the fourth quarter for Japan and on cuurent trends it is the third quarter performance that looks an aberration. There are other factors to be considered such as the tsunami’s ongoing impact on energy production and the floods in Thailand which have affected Japanese suppliers but even so the trajectory does not look optimistic. I would like readers to keep those facts in mind as they read the next section.
Japan’s planned budget for 2012
There are various concerns with Japan’s planned budget for 2012 but I would like to draw your attention to one factor which bothers the Japanese themselves. They plan to borrow 49% of their public expenditure in 2012 and even worse the borrowing (44 trillion Yen) will exceed the expected tax take of 42.3 trillion Yen. As you mull over the implications of borrowing more than your income let me point out that this is for the fourth year in a row and that these numbers are optimistic as some borrowing has been omitted and the tax take assumes tax rises which have not yet happened.
How has this happened?
I looked up some comparable numbers and the situation is that Japan is a low tax economy. Her total tax take is approximately 17% of her economic output. I looked up comparable numbers from the UK Office for Budget Responsibility and saw that the expected tax take in the UK is just over 36% both this year and next. In the UK revenue from all forms of employment (total revenue from income tax and national insurance) is at 17% the same as the total Japanese tax take.
So I will leave you today with three questions.
1. How much has the low tax take contributed to Japan’s economic growth?
2. If you look at her economy which is showing signs of weakness how can she raise taxes (as planned) without weakening her further?
3. Do the implications of the questions above imply that she may be end-gamed?