Japan has been hit by a double-whammy: the global fall in trade, made worse by its (formerly) rising yen.
While deteriorating conditions in China generally get more media attention, the falloff in Japan is stunning and serious. Japan has spent more than a decade stagnant, but the overall growth figures mask the fact that the domestic economy contracted, while the export sector exhibited good growth.
The export plunge (December’s results horrid too, a 35% fall in exports), means that Japan’s only engine of growth has gone into stall. China, by contrast, is not as dependent of trade for its overall performance as is popularly believed (commercial real estate and infrastructure spending have also been important sources, although CRE has taken a dive too).
The fact that Japan is now running trade deficits also means they will not be accumulating foreign exchange reserves, specifically buying Treasuries (Japan could still buy Treasuries to lower the value of its currency, but the terrible economic news has already put the yen on a downward path).
From Bloomberg:
Japan’s exports plunged 45.7 percent in January, resulting in a record trade deficit, as recessions in the U.S. and Europe smothered demand for the country’s cars and electronics…
Gross domestic product shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, and economists predict the slump will drag into this quarter. Toyota Motor Corp., Sony Corp. and Hitachi Ltd. — all of which forecast losses — are firing thousands of workers, heightening the risk the recession will deepen.
“The drop in exports is unbelievably bad,” said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo. “The pressure on companies to cut jobs and investment is rising and that will make the recession deep and protracted.”…
Japan’s economy, the world’s second largest, may shrink a record 4 percent in the year starting April 1, faster than this year’s projected decline of 2.9 percent, according to the median estimate of 15 economists surveyed by Bloomberg News. The worst contraction to date was fiscal 1998’s 1.5 percent drop.
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Hey everyone. I think I figured out a way for us to sue the Fed and Treasury to challenge the legality of their alphabet soup of lending facilities.
Governmental agencies are required by law to give the public a notice and comment period BEFORE issuing regulatory rules. This is required under the Administrative Procedure Act, Section 553.
If you review Treasury’s and the Fed’s creation of their alphabet soup of lending facilities to help the big 6 banks and GS and MS, the Fed and Treasury mostly have been creating the programs through announcements. They have not been issuing a notice in the federal register (the official publication of regulations) with notice period for interested parties to submit comments and then participate in a hearing.
This may mean that the various programs are ILLEGAL due to violating the APA.
I am not an expert so I don’t know if private citizens can sue to void agency actions that violate the APA. However, most certainly community banks and credit unions that have been screwed over by the Fed and Treasury’s assistance to their competitors would have standing to sue the Fed and Treasury to overturn their assistance to the major banks.
Spread the word to the credit unions and community banks and civil rights groups like the american civil liberties union. Hopefully, Bernanke/Paulson/Geithner slipped up and violated the APA, and we can get the courts to overturn their programs as ILLEGAL actions.
Also, if the Fed and Treasury does start having notice and comment periods, we should start showing up at the hearings to protest. The Fed’s and Treasury’s actions as promoting systematic risk by encouraging corruption, incompetence, and reckless speculation.
Yves – off the subject, but I think you will enjoy:
http://mail.google.com/mail/?ui=2&ik=59ce9e554b&view=att&th=11faac40a0c95755&attid=0.1&disp=vgp&zw
Peter
Don’t worry Baby
I expect any newfound yen weakness arising from economic crisis to face a strong headwind as Japanese households repatriate savings which were invested overseas. These holdings are heavily concentrated in formerly high-yielding currencies, putting the crosses under even worse pressure. Still today the Tokyo metro and rail lines are littered with advertisements for home FX trading, though I’ve seen nary a one for domestic equities or bonds.
Even if the yen does weaken somewhat due to these newfound deficits, or it fails to strengthen further, the extraordinary weakness of other currencies such as the KRW and CNY will continue to threaten Japanese exports, as they compete in many categories.
While Japanese policy has opted for a weak yen to stimulate exports, with an aging population having significant overseas holdings, Sakakibara’s comments regarding yen strength being beneficial to Japan may also gain currency in policymaking.
I’m very comfortable projecting the decline in Japanese exports and GDP well into the future, but persistent yen weakness is much less obvious to me.
One of the questions that comes to mind about foreign currencies is the implication of the trillions of dollars being magically created in the past few months and to come.
What choices to countries (excluding US) have?
They can do nothing.
They can print money as fast or faster than the US to keep up.
They can consort with other countries, with which they trade regularly, to develop trade agreements with financial settlements that go around the current Reserve Currency cross settlement.
They can consort with other countries or blocks of countries to force a new world monetary system.
We are seeing movement in all the possibilities that I mention. I expect definitive movement on the last on by the end of the year or sooner depending on how tightly Wall Street holds on to the financial excesses of derivatives and how strongly the rest of the world reacts to continued US financial immorality.
As to how trade will sort itself out if there isn’t total protectionism…..well I think the big if revolves around consumption-of-crap levels. Have we indeed mortally wounded conspicuous consumption. While I hope so I am not deluded to believe it will ever die entirely. There are too many people that are followers….I digress
Outside of food and basic infrastructure trade levels what will be made, who will make it and who will buy it. I think that before this is over that there will be enough of a hit to the marketing definitions of “NEED” that whole new ways at looking at consumables will be born.
Change provides opportunity for growth.
ndk,
Japanese have already largely repatriated their yen. A survey from Gartman showed that any residual was likely by Japanese corporation as hedges, and that is expected to tail off by the end of the Japanese fiscal year (March 31).
Retail traders are long yen. The yen is still at very high levels compared to historic levels. It would not be surprising to see them start shorting yen again.
Seems we’re two huge unknowns away from any kind of sanity.
– The domestic financial industry black hole must be allowed to destroy itself, or be filled – with a few generations worth of currency devaluation
– Resolution of the currency question, or finding a monetary anchor. The uncertain US dollar will not suffice for the foreseeable future, recent strength notwithstanding.
Thus Japan, or anyone else for that matter, cannot expect to remain intact until these unknowns are resolved.
Yen tanks.
Consumption-of-crap goes to zero plus.
World labor/middle class wakes up, unites and riots.
Billionaires, ruling elite, corporate captains, and their collaborator media sell outs are hunted down and killed for sport like wild pigs.
Beach Boys are revered as the Gods that they are …
Obama‘s speech was a dud.
Deception is the strongest political force on the planet.
i on the ball patriot
You(and Gartman) are right, Yves. That only covers margined retail future contracts and not actual holdings e.g. in trusts, but those are declining too. That would seem largely due to the relative strength of the yen and poor performance of the underlying securities, though there are real outflows too.
It’s stunning to me that those accumulated positions are being unwound so quickly. Combined with the trade deficit, I definitely need to reconsider whether and how much the Yen could fall. Thanks for the insight.
Yves,
This is for you: Get Well
@doc, which is better your randomness or Yves shovel, a tie I think.
skippy
@ i on the ball patriot 10:17 pm
I was hearing “Don’t Worry Baby” (Beach Boys) in my head BEFORE and WHILE reading your post. It’s curious that you mentioned Beach Boys.
Obama gave a great Democratic speech. I liked most of his material, but not his comments about banking or social security.
It’s too much banking bailout so we should work on that. On the political front we have to keep influencing our Congressmen. The Republicans may be useful in this regard (I can’t think of any other way they are useful, but they did stand up against TARP).
Will be interesting to see what the worldwide middle class does. The Democrats should be supportive; the middle class is their natural constituency. We’ll make sure they are more supportive even than they planned to be.
Jindal’s speech was … pathetic. But what could he do? He had no ideas and a bad party to apologize for. The Republicans are sinking fast. We can give them an issue that will make them more popular: stopping bank bailouts.
skippy,
Re: which is better your randomness or Yves shovel, a tie I think.
I like to think she has a hammer or tongs, but I can see a shovel, yah, why not.
Also see: Hephaestus (pronounced /hɨˈfiːstəs/ or /hɨˈfɛstəs/; Greek Ἥφαιστος Hēphaistos) was a Greek god whose Roman equivalent was Vulcan. He was the god of technology, blacksmiths, craftsmen, artisans, sculptors, metals, metallurgy, fire and volcanoes. Like other mythic smiths but unlike most other gods, Hephaestus was lame, which gave him a grotesque appearance in Greek eyes.
See & Hear: Дельфин и Русалка
Ok, back to work..
Can the Holy Roman Empire family and their counterparts just get along, the really powerful in this world have to stop picking@/settling/bickering old scores/sores, I for one grow weary of this medieval mindset. The human race is on the cusp of great things but this malarkey is setting us back so, stop it please.
For those that regard this as some random event please read a bit of history, the powerful fight and we lose, until we get pissed off and give them a reality check sonner or later. Lets try sooner this time.
skippy
It seems to me that the US is starting to look like one of the best economies. If the retrenching in US consumer spending is here to stay, most of that pain will fall overseas to the countries that export to us. Not all of the pain of course. Retail shops are closing at an amazing pace. I don’t think the media has really covered this story enough since the numbers probably are not out yet. I drive around Chicago and am amazed at the pace. Every day there is a new shop closed. There has been so much change in just the last month. I assume it must be the same in most big US cities. I do wonder where these retail people are going to get employed next.
We reversed the Yen carry trade, but we have yet to finish reversing the “American consumer carry trade”. This was a self-reinforcing virtuous cycle whereby the principle of “shop till you drop” guided US trade, currency and interest rate policy in relation to Japan and others. Reversal of this carry means we are now exporting deflation.
As we’ve seen, letting up even slightly on the consumerist gas pedal has resulted in global economic free fall. After decades of recklessness, the bill has finally come due on America’s big shopping spree. The music has stopped and Japan will be looking back at the lost decade with fond nostalgia.
To S,
Your rebuttal to artichoke appeared pretentious, arrogant and uncalled for.
Indeed, you sound like a noxious prick that thinks itself smart.
S,
That was a no-substance snarky attack. I’ve deleted it. More of that sort of thing will get your IP address blocked.
If you have a substantive point, that might be a different matter, but I have no interest in people who come here just to piss in the pool.
Someone who can write a sentence like “I’m very comfortable projecting the decline in Japanese exports and GDP well into the future” ought to think a little more carefully about what words mean. That’s one of the ugliest, if unintentionally so, comments i’ve read in the blogosphere recently, which is saying something.
As for the US seeming like the strongest economy, relative to the disasters around the globe, i’d say that’s probably true, But the closing of retails shops is much more than bad news for people who work in them. It’s the bleeding edge of our whole economy.
And don’t let anyone tell you conspicuous consumption is dead. It is merely morphing into forms we cannot yet fully understand. But wealth will always need means to signify itself. Always.
Yves,
Japan will not be accumulating reserves in 2009. China will likely accumulate $250B or less. Who will fund the net increase in debt?
Setser points out the Feds had no problem raising $1.5T last year. But that was a result of crashing asset markets around the world and the ensuing flight to safety, no?
Where will it come from? Not another round of crashed markets. Do I hope against hope? Is there some source of free cash flow in the globally contracting economy that I am too naive to factor?
I think I’ll sell my Toyota and buy more gold.
Vinny
Wow, I just checked back here, and now I wonder what S. said. Whatever it was, apparently it didn’t deal substantively with my comments, or Yves would not have pulled it.
S. whoever you are, come on, beat my arguments fair and square! Is it that you think we should have more bank bailouts, or that we cannot stop them?
My argument against Brad Setser’s view that China’s import declines will be less than China’s export declines, thus that China will continue to accumulate reserves at recent rates, is to look at the crash in exports from developed East Asia, as some considerable portion of those exports are exports of higher-level intermediate components for Chinese manufacturing exports to RoW. If that surmise is right, then the crash in developed East Asia exports could be signaling a lagged decline in Chinese exports, as consumption demand from RoW sharply retrenches.
Furthermore China at the government level will be spending their USD, probably in a hurry before the USD depreciates. China was just on a shopping trip in Europe buying hi-tech products from several countries there (excluding France whom they are mad at.)
Bonesetter Brown,
If nobody else buys the T-bills, the Fed should buy them and is already buying them.
In the long run it’s inflationary. But we need inflation anyway, to reduce debt burdens in real terms.
artichoke,
So print and buy. What percentage of ~$2T in new debt will be purchase in this manner in 2009? Over $1T perhaps?
I keep hearing (annoyingly) that China is on a shopping spree. How come this alleged high level of purchasing is not reflected in equity prices? Equities depreciate all over the world while dollar appreciates. Why is the rush?
I don’t have a good feeling for the numbers, but OK say the Fed buys 1T this year.
I think we should expect inflation in many countries, a scenario that will not look much different from competitive devaluations, except that it isn’t really competitive at least at first because there will be little international trade to compete for. Everyone needs make-work programs and inflation to make life bearable for the worst-off (and even the middle class) in their populations.
I know China is buying up natural resources. There may be Chinese stocks benefitting from that, but even they won’t zoom up in price because the markets they sell into are impaired.
The equity prices will probably not increase much until inflation is imposed by a country’s central bank.
I’m surprised too by the US dollar’s strength. I guess it is the least-bad world currency.
The Chinese yuan cannot be a reserve currency at any rate because it’s not freely convertible.
I think China’s “buying spree” is very much exaggerated at this point. We’re talking less than $25 billion in asset purchases, $25 billion in loans in exchange for future oil deliveries, and a few billion for European products.
If we take the optimistic view that China will eventually start spending those USD… then we have to also adopt the pessimistic view that China doesn’t see a bottom in asset prices, yet.
Anon 1:48am heh that’s an interesting perspective.
I would expect them to buy whatever looks useful, since they have so much to spend that they’ll be buying for a long time anyway. But maybe they have more guts than I would in their shoes, and are holding out for even better prices.
It’s not clear to me, anyway, that commodities will get much cheaper. Did they go to zero in the Great Depression, I don’t think so.
john c. halasz,
Hart-Landsberg & Burkett would most probably agree, and provide some data to that effect in this 2006 paper:
China and the Dynamics of Transnational Accumulation: Causes and Consequences of Global Restructuring
Comfortable only from an analytical standpoint, and I didn’t intend it to come off as anything more. I’m writing from Jimbocho right now. The export disaster is not at all visible yet within the major parts of Tokyo, but I imagine it will look different in a year or two. Sorry for that.
Part of the problem for Japan is that they allowed inventories to build up and now they have had to virtually shut down production while those inventories are run down. The forth coming tax changes will allow Japanese international companies to repatriate earnings to compensate somewhat, but the real problem would appear to be that they have had an employment shock where short term workers have all be laid off. This will feed into domestic consumption and risks a self reinforcing cycle. Having built all the bridges to nowhere possible it is now hard to see how they will combat unemployment quickly enough to stop the cycle. Buying shares as they are now suggesting will not tackle unemployment, so the new finance minister probably needs to start really thinking about the future.
The question then becomes how do we extrapolate from a downturn in the fortunes of the Yen and Japan. At first glance it looks like they will be able to cut dollar prices of their goods and maybe exports will pick up. The reality is that much of Japans manufacturing is distributed so the price impact will be far less than you might expect. I do expect GM will have to take a further red pen to those sales estimates as a result though and you can see the Yen devaluation as a way Japan can export its unemployment to the US. As to how far the Yen will fall then I think you need to look for clues in the story of sterling, another head office type economy. A 50 percent drop and exports are still struggling to pick up, but it is causing havoc with other economies (Ireland).
I don’t expect things to be quite as bleak as depicted but I think it gives a clear pointer for the eventual fate of the US. Despite low interest rates, despite QE, despite massive stimulus, the development of the carry trade, years of stagnate growth the economy eventually falls off the cliff anyway.
Yves: exports are almost certianly a lower share of Japan’s GDP than the value-added in China’s export sector is to China’s GDP. Exports to GDP for Japan was never all that high. Japan just traditionally doesn’t import many imported manufactures (this is changing as japanese firms produce more in china), so it is a big exporter (and its value added is high). and while japan’s overall growth was slow and it unquestionably relied on exports for large chunk of what little growth it had, net exports weren’t contributing a sustained 3% to GDP growth in the way they did for chine from 05 to 07 (the contribution in 08 will be positive, but smaller). don’t discount exports role in china, even if exports alone didn’t generate 10% plus growth (that came from a lot of domestic investment, as you note)
bsetser
Japan has bailed out the IMF to the tune of 100 billion USD. Where does the money come from? Are the Japanese going to print trillions of yen to buy dollars or else will the IMF sell on behalf of Japan some of its US treasury holdings? No direct intervention in the markets, no accusations of currency manipulation.
Anyone serious about solving the financial crimes we are being subjected to should study this link and its comments:
http://oxdown.firedoglake.com/diary/3820
connect all the dots.
Yves,
What ever happened to the “letters of credit” story line from a few months back? Is some of this huge decline in trade due to the credit crunch?
Everyone is tacitly attributing 100% of these big declines in trade volume to “nobody’s buying stuff”. But I don’t see anybody attempting to measure anything, just a lot of panicky assumptions being made.
STS,
A lot of organizations are measuring all aspects of global trade right now… they just aren’t the people that typically get the Wall Street press… so you aren’t reading the right sources.
There are a lot of people buying stuff and a lot of goods are still moving. Even if global commerce dropped by 5% in 2009 (which it never has and isn’t forecast to do)… global manufacturing will be at 2007 levels… that means $42 trillion of goods and services still happening.
The reason for the current recession… more capacity than demand and the excess capacity was purchased on credit. It is just a supply-demand imbalance, causing deflationary pressures on the supply side. It doesn’t mean demand doesn’t exist.
The reason for the current export drop… too much inventory vs. demand, and the inventory was built up because the corporations were trying to capitalize their excess capacity. Inventories have to be worked off before a more moderate manufacturing / export picture resumes.
@Anon 3:05
Thanks for the reply. I’m sure lots of people are “measuring things”, but worried that they’re watching the wrong gauges. Wall Street “measured” something they called “risk” using a gauge called “VAR”. Doesn’t mean they had a clue what was going on.
Maybe the problem is partly just that the annualized numbers exaggerate. Down 3.83% during a month becomes down 46% annualized.
Are you predicting that the volume of trade will work off the extra inventory in a couple of months and we’ll never get lower than 5% below December 08’s volume at any time in 2009 despite having already gone down 3.83% in one month? Or simply that Japan may go much lower, but the world as a whole will not? I suppose the strong Yen would make things worse than average for Japanese exports.
I’m wondering if the decline in demand actually accounts for more like 2% of the January decrease in Japanese exports and the other almost 2% is coming from scarcity of letters of credit and or currency effects. That could have some bearing on how deep the recession proves to be. It would be helpful if some economists and/or reporters attempted to analyze this. But both groups seem to spend more time recycling story lines than doing original research. (Or the original research is just kept secret as a trading edge …)
Sorry, the 47% isn’t annualized. It’s a year-over-year comparison. So the “it’s due exclusively to lower demand” explanation seems even less plausible.
Half of the total value of Japanese exports a year ago was exported to Joe Six-Pack at Walmart? Joe didn’t show up at Walmart in January, so half as many containers are crossing the Pacific? Even as the price of oil plummets? Even with the cost of the container ships 90% down from the peak a year ago?
How much has consumer spending declined in the US? Not 47%. Not yet at least. In the early 30’s it took 4 years for the economy to contract 40%.
The “lower demand” explanation just seems off by an order of magnitude.
STS,
Trade is much easier to measure than Wall Streets VAR because you have tangible goods with known fixed costs.
You are over-thinking the “lower demand” thing.
“Are you predicting…” No, I don’t predict because I don’t see the future and everyone that has a timeline of events is always wrong. But I do know how business works. I’ve modeled out all kinds of worst case scenarios and at the end of all of them, the world does not come to an end and global trade moves along.
Exports from Japan fell 47% (insert scream here)… if a big export of Japan is cars and there are cars sitting on the dock in Long Beach (inventory) why would they export more cars? The inventory needs to be worked off first before they export again.
There are 2 reasons why there are cars sitting in Long Beach. First, demand fell… meaning the velocity of inventory fell, a pretty obvious concept. The second reason is that there was too much standing inventory for the new level of demand (over supply)… somebody forecast poorly. Until inventory on hand falls to the new level of demand, they do not need new cars in Long Beach.
Will this last forever? Of course not. Cars are a durable good so their useful life is 5-7 years, so at some point they will break and demand will pick up again.
>Cars … useful life is 5-7 years, so
>… they will break and demand will
>pick up again.
So very reassuring. I guess the other 80% of Japanese exports that aren't auto-related will bounce back … even … faster! (Think positive!)
I'll stop over-thinking now. Wake me when this is over.
-Rip van Winkle