Japan Nominal GDP tells the True Story
For a country caught in a deflationary trap, it makes little sense to follow protocol and focus on real GDP growth, especially when it is driven primarily by falling prices. Recent economic data in Japan suggest deflationary pressures are showing no signs of easing as employment conditions remain depressed. Winter bonuses will be slashed -14% this year, the worst on record, while hours and nominal wages continue to decline. The October Tokyo CPI also paints a painful picture as price wars, a strong yen and weak demand are pushing prices lower in practically every category, especially in the discretionary demand components such as clothing and furniture.
Turning to the GDP figures, there was a mixed response to the Jul-Sep GDP release Monday, with some economists being as bold as to envision a swing in private domestic demand. Newspaper headlines focused on the real figures, highlighting the surprisingly better than expected numbers. In the fine text, they wrote about the sinking domestic demand deflator, the worst on record at -2.6%.
The sad news in the recent GDP report is while the rest of the world is recovering, Japan is still shrinking, if you look at Nominal GDP. Meanwhile, the strong yen keeps the pressure on exporters. At present, exports and public spending are the only means of real support as the rest of the economy struggles to survive. While real GDP was up for the first time since Q4 2007, nominal GDP seems to keep on sinking into the abyss as the graph below shows. Japan is the same size as it was in 1994. With fiscal stimulus fading out of the picture soon and the consumer trapped in a jobless recovery, it does not look encouraging.
The one positive indicator in the GDP release was private capital investment, which appears to be turning the corner as profits recover and the cyclical recovery forces companies to at least stop cutting back. On the other hand, housing investment is less than it was in 1980 and still sliding. Low interest rates are having no impact on home sales as job security no longer exists in a potential home-buyers future life plan. What this means for consumer spending is until wages stabilize and income conditions improve, consumer spending may keep falling to a level well below what was seen prior to the financial crisis of 1998.
R Taggart Murphy, author of “The Weight of the Yen,” makes an effort in the “Japan doomsday fears premature” article to ward off the doomsayers who are pushing the short JGB call (i.e. Einhorn of Greenlight Capital). This argument is nothing new for Japan. For over a decade, economists argued Japan could cause a global financial crisis given its three-tier problem of deflation, demographics and debt. What is often ignored by foreign critics is who owns Japan’s debt…Japanese institutions. As for other points Mr.Murphy makes towards the end of the article, a strong yen will not help Japan. Look at Japan the past 20 years. It doesn’t work. Meanwhile, the case for higher interest rates being good news for the Japanese consumer was made in 2006 by some economists in London and it failed to grasp what makes consumers tick. Wages need to rise ahead of interest rates! Mr.Murphy also makes an argument that the DPJ’s plans to reinvent Japan could be aided by a strong yen and high interest rates as it helps clean up producers. The problem with Japan is not really the manufacturers, it’s the non-manufacturers and small businesses that drag down growth as they fail to recognize the need to turn out a healthy profit (take a look at A Country Lost).
Is Japan doomed??….Not just yet. What Japan needs most is leadership that takes a realistic approach to dealing with the slew of problems the country faces. I have yet to notice anyone who fits the role in the Japanese Diet. So far, the DPJ has not provided the leadership Japan needs and it is not clear if they can.
