Limping Along in Japan?
Last week was certainly something was it not? I,for one, had a couple of hick-ups throughout the sessions as I peered at the news and the incoming data. Monday and Tuesday started with a rout and then as the Fed rocked the markets with a 75 basis point decrease in the interest rate the bulls, hitherto locked up in their pen, were released in all their might and glory only, it seems, to have been rounded up again as we enter a new week. In short; volatility last week was tremendous and the sentiment gauge likewise. As the proverbial icing on the cake one of modern times' most spectacular cases of financial fraud hit the posters as Société Générale revealed that one of their traders had taken out positions for an almost unbelievably big amount. Even more delicate is now the contention that the massive sell-off by Soc Gen as they realized their predicament was what caused the heavy market tumbling on Monday in the first place and thus, indirectly, Bernank's pull in the panic lever.
So, all in all a pretty eventful week I would say which of course begs the question of what happens next?
I don't have that answer of course but as I am gearing up for the monthly data release of key figures from Japan and thus the promised continuation of my ongoing analysis of the great country to the East (from my perspective at least) I want to set the scene a little bit. Over at Japan Economy Watch Edward has made a stalwart effort in terms of providing an updated overview of the course of events as we have moved along in what has undoubtedly been a rough start to 2008. In general I take note of the widespread downward looking tendency of the incoming data which at this point comes from the latter months of 2007. Especially consumer confidence has seen a sharp drop as we exited 2007 which does not bode well for consumption expenditures in the immediate future. This brings us to the much scrutinized topic of Japanese inflation and how indeed it seems as if we have moved out of the deflationary trap at this point. Yet, this is of course not the main story. The inflation we are currently seeing in Japan is entirely due to cost-push dynamics as it originates from headline price dynamics and as such if we look at the inflation index stripped of these price dynamics Japan is in fact still stuck in deflation. At some point even the core-of-core index might sneak into positive territory but that is hardly the main message to take away since what is so obviously clear at this point is that the current inflation dynamics in Japan are not tied to internal activity. In fact and this is rather ironic or tragicomic depending on how you look at it inflation might actually just be pushing now at this point as Japan enters a down and thus further squeezing consumers. Lastly, exports are also heading for less perky times even though of course the overall growth rate is still rather impressive. As I move in for a more detailed look at Japan later this week (hopefully) I will have more.
Meanwhile, today also sees a couple of interesting news points on Japan. Firstly and following in line with the rest of Asia's markets the Nikkei 225 index sank 4% today as it seems as last week's exuberant bull run on Wednesday through Friday does not seem to linger into this week. Day to day movements in the stock market are of course of little importance to anyone but the serious punters and traders out there but if we look at the Japanese markets in general anecdotal evidence is abound that investors seem to be taking a rather dim view of investing in Japan. As Morgan Stanley's Feldman put it recently ... (via SeekingAlpha)
This attitude [edit: the lukewarm attitude] stems not only from adverse macroeconomic developments in Japan (such as consumer sentiment collapse), but also from the atmosphere in the U.S. and the global economy. So long as subprime problems, credit problems, the global slowdown and high energy/agricultural price problems remain, it will be hard to convince investment committees in the US to raise weightings in Japan.
Given Japan's gloomy demographic future and most notably other nation's perky ditto I think that this is a very important sea change to watch out for. Turning to current events Goldman Sachs seem to have developed the in-house belief that Japan is now heading for a recession ...
Japan has probably fallen into recession, ending the nation's longest period of growth in more than 60 years, according to Goldman Sachs Group Inc. Factory production will fall from a fourth-quarter peak, while consumer spending and the construction industry are slowing, Tetsufumi Yamakawa, Goldman's chief Japan economist, wrote today in a report. ``The recession is a product not of an anticipated recession in the U.S. triggered by the subprime loan problem, but a slump in domestic demand,'' Yamakawa said.
For regular readers of Alpha.Sources and Japan Economy Watch this is hardly news as the R-word was uttered already back in September. Now, we just have to wait and see what happens. Markets seem to be moving in for somewhat of a severe slowdown in Japan epitomized by the recent gain in bonds as yields fell (remember that bond yields move inversely to prices) to reflect investors' demand for the safe return of bonds relative to more risky assets. Of course we might see the opposite tomorrow but what is clear to me (although by no means everybody) however is that de-coupling as it was traditionally envisaged is now well and truly the story of the past. At least, we need to refine the idea substantially of Japan and the Eurozone in the global economy and thus above and beyond the traditional de-coupling discourse.
Conclusively, it is pretty much (un)steady as she goes in Japan as incoming data indicate that a downside risk has now emerged that we might be looking for a recession. When we have consumption data for December I think things will be a little bit clearer as to how fast this is moving as well as of course the unemployment data will provide useful indications as to how fast the ripple effect of the slowdown is passing through the economic channels. Lastly, you are probably wondering why I have not mentioned the Yen with one single word. Well, there is a perfectly logical explanation for this. You see, this post is about the macroeconomic fundamentals of Japan and if there is something which the Yen does not respond to at the moment it is the macroeconomic fundamentals. Risk aversion and thus the yo-yo like unwinding and 'winding' of carry trades seem to be the main driver of the Yen at the moment. Last week for example saw a remarkable and strong correlation with the Yen and the stock markets. When stock market went up the Yen depreciated and vice versa of course. Whether this very strong tie between the Yen and general risk sentiment in the market will continue remains to be seen but so far this is the Yen should be played it seems.