Crunchtime in Japan?
Well I have pointed to this several times and most recently as the CPI index was revised bringing Japan dangerously close to the 0% inflation mark amidst talks of business cycles topping and whether the BOJ should indeed raise rates any further. This is of course very unlikely now and the future road for Japan might very well be another period of deflation or at least no-one can rule out this possibility at the current juncture I think.
Now, a revision of the statistics might not be important in itself but let us take a quote from and article in The Economist I used as a source in one of my posts linked above.
'This reshuffling of the statistician's shopping basket has rewritten recent history (see chart). Japan, it now seems, did not escape deflation definitively until July, when the core annual inflation rate reached 0.2% for only the second month in a row. As Richard Jerram, of Macquarie Research in Tokyo, puts it “price pressures today are where the BoJ thought they were six months ago.”'
So Japan is not quite out of the deflation spiral it seems or at least trying hard to get off the mark. On top of this the US is slowing which will be sure to dent Japanese exports. China will probably be able to do some heavy lifting here for a while but the main point here is that Japan lacks the domestic demand structure to carry through a sustainable recovery. Why? well a brief look at the country's demographics is of course quite illuminating here as I have argued several times. Another blogger worth mentioning here is Edward Hugh at Bonobo Land who actually was the one who initially steered me into seing Japan the way I do today ... more or less that is. His latest report on Japan is also very telling of things to come ...
Machine orders in Japan is falling rapidly ...
'Japan's machine orders fell the most in almost 20 years, dashing expectations that the central bank will raise interest rates before the end of the year.
Non-government orders excluding shipping and utilities dropped a seasonally adjusted 16.7 percent in July from a month earlier, the largest slide since October 1986, the Cabinet Office said today. Orders from semiconductor, steel and mobile-phone businesses paced the drop.'
(Quote Edward)
This is what we could call a second stage event, and now has all the hallmarks of a classic domino chain, although it still isn't clear how far it will reach (all the way to Shanghai??). I am not at all convinced that investment in the US will take up the slack given what we know about fixed capital investment in China, and given the way capacity in things like machinery and equipment has just been ramped up so much in Germany and Japan. As we can see, in Japan it is fixed capital investment that is being hit first.
So watch out everyone, 2007 could be a very complicated year.
The Yen/Euro relationship also tells an important part of the story here ...
(quote Bloomberg - bold parts are my emphasis)
'The yen had its biggest drop against the euro since April on speculation the Bank of Japan will lag behind the European Central Bank in raising interest rates this year.
Japan's currency also slid from a one-month high after a government report showed machinery orders fell the most in almost 20 years in July. ECB Chief Economist Juergen Stark was reported today as saying inflation in the 12 nations sharing the euro will stay above target this year and next.
The drop in machinery orders `` confirmed the market's expectation that the Bank of Japan is likely to raise rates at a very slow pace this year,'' said Kamal Sharma, a currency strategist at Bank of America Corp. in London. ``The yen is likely to remain under pressure.''
(...)
``We'll see widening interest-rate differentials from here,'' said Benedikt Germanier, a currency strategist in Zurich at UBS AG. ``The key for euro-yen are the machinery order numbers which came in weaker.''
Non-government orders excluding shipping and utilities dropped a seasonally adjusted 16.7 percent in July from a month earlier, the largest slide since October 1986, the Cabinet Office said today. The median forecast of 30 economists surveyed by Bloomberg News was for a 5.4 percent decline.'