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Thursday, May 7, 2009

Japan's Economic Contraction Stabilises In March

by Edward Hugh: Barcelona

Japan's contraction showed signs of easing in March, even though the recession has now set in for the duration, the deepest point may well have been passed. The ship may be stable, but it is still far from being right side up.

Industrial Output Up On The Month

Japan's industrial output rose in March (more than anticipated), and showed the first gain in six months, suggesting that the steepness in the plunge in production and exports may be softening. The rise followed a record 10.1 percent fall in industrial production in January and a 9.4 percent drop in February. Manufacturers also forecast further gains in production in the coming months, suggesting output may be bottoming out after the sharpest decline on record in the first quarter of the year.

Industrial production rose 1.6 percent in March, more than the 0.8 percent rise forecast by the economic consensus. In the monthly ministry survey manufacturers stated they expect output to rise 4.3 percent in April and 6.1 percent in May.

This impression is also confirmed by the latest Nomura/JMMA Japan Manufacturing Purchasing Managers Index reading, which rose to a seasonally adjusted 41.4 in April from 33.8 in March, the steepest gain since data were first compiled in October 2001. However the index remained below the 50 threshold that separates contraction from expansion for the 14th straight month.

Japan is currently passing through its worst recession since World War Two. Following a 3.2 percent slump in the fourth quarter the economy is expected to contract even more in the first quarter, despite some tentative signs of a softening in the contraction. Exports, for example, rose in March over February, the first month on month expansion since September last year.

Retail Sales Fall Again In March

Japan’s retail sales fell for the seventh consecutive month in March, and were down by 3.9 percent from a year earlier in non price adjusted terms. This follows a 5.7 percent drop in February - the steepest pace of decline since February 2002. From a month earlier, seasonally adjusted retail sales dropped 1.1 percent in March, to record their sixth straight monthly decline.

With the economy in such a sharp contraction, and unemployment rising, families are obviously apprehensive about the future, and have been spending less. Average monthly household spending declined 0.4 percent from the previous year in March, according the Ministry of Internal Affairs and Communications. The average household spent 310,680 yen ($3,186). This follows much steeper annual declines of 3.5% and 5.9% in February and January respectively. So, in line with other indicators, the household spending picture did improve slightly in March, and retail sales were not falling as fast as they had been.

Confidence among Japanese small traders rose to an eight-month high in March, adding to signs that the economic situation improved somewhat. The Economy Watchers index, a survey of barbers, taxi drivers and others who deal with consumers, climbed to 28.4from 19.4 in February, the second-biggest jump on record, according to the Japanese Cabinet Office.

Japan’s consumer sentiment alos rose - to a five-month high - in March, and the confidence index climbed to 28.9 from 26.7 in February. The index has now advanced for three consecutive months since after plunging to 26.2 in December, its lowest level since the government began compiling the figures in 1982.

However, Japanese wage earners' total cash earnings fell at the fastest rate in nearly seven years in March from a year earlier, as companies worked desperately to cut costs. Overtime pay fell a record 20.8 percent from a year earlier as many Japanese manufacturers stopped factory lines following the plunge in global demand. Total cash earnings fell 3.7 percent to 273,561 yen ($2,805) in March, the largest fall since July 2002, when wages fell 5.7 percent. It followed a revised 2.4 percent drop in February. Both disposable income and real wages have been falling sharply since the start of 2009.

Deflation Setting In Again

Japan’s consumer prices - as measured by the general index - fell for the first time in more than a year in March, a sure sign that deflation is resolutely raising its ugly head again. The general index fell by 0.3%, while consumer prices excluding fresh food declined 0.1 percent from a year earlier. The core core index - excluding both food and energy - also fell 0.3%. Bank of Japan Governor Masaaki Shirakawa argued last week that he sees little risk of a deflationary spiral, even though the BoJ policy board forecast that consumer prices will drop 1.5 percent this fiscal year and 1 percent in the year starting April 2010.

Unemployment On The Rise

Japan's unemployment rate jumped to 4.8 percent in March, the highest level in more than four years. The total number of unemployed people rose by around 670,000, or 25 percent, from a year earlier to 3.35 million in March. The unemployment rate, which was 4.4 percent in February, is now the highest since August 2004, although it is still below the post-World War II high of 5.5 percent last seen in April 2003.

But behind the headline unemployment numbers, a very significant restructuring would seem to be taking place in the labour force. If we look at the charts below (which shows the size of the "regular" - permanent contract - labour force, as well as movements in the employment of full time and part time workers), it is evident that there was a sharp drop in the regular workforce (around a million) between December and January. Since total employment did not reflect this change, it would seem that there was a significant change in the form of contract (structural reform) and this increase in temporary and part-time employment would seem to be reflected in both earning figures and spending patterns.

The Japanese economy is set to shrink by 3.3 percent this fiscal year according to the latest government forecast, and by 6.1 percent in 2009 according to the IMF spring forecast. Finance Minister Kaoru Yosano said last week that the economy remains in “crisis” as the slump in exports and factory output evidently will continue to take a toll on employment. Prime Minister Taro Aso's Cabinet recently submitted a massive supplementary budget to finance a new stimulus package. Aso has called for a record additional 15 trillion yen ($155 billion) in government spending, equivalent to about 3 percent of Japan's gross domestic product. The government argue the newest stimulus package will help protect the economy from slipping further while laying the foundation for future growth, including incentives for buying "eco-friendly" cars and home appliances. It also provides support for the unemployed and small businesses. However, despite such bold claims the Japanese governments hands are most firmly tied by the very large levels of existing debt (see chart below), with the IMF forecasting that Net debt will rise to 103.6% of GDP in 2009, and gross debt to a staggering 217% of GDP. So basically, however much the current stimulus package may serve to soften the blow of the downturn in global trade on Japanese households any real recovery will have to await a recovery in global trade, and despite all the current talk of "green shoots" everywhere, we are still some way from being able to perceive this at this point.