TokyoTalisman: 03/01/2009

Japan has been in a malaise for 20 years. And just when it looked like the country
might turn around, the bottom has seemingly fallen out. Japan’s economy shrank
a slightly revised 3.2% in the last quarter of last year, confirming the
sharpest contraction since the oil crisis in 1974, and economists warn of
further contraction in the next two quarters.
The Japanese economy, mired in its
worst recession since World War II, is forecast to shrink a further 2.5% in the
first quarter of this year and another 0.4% in the second quarter, a Reuters
poll shows.
But if you look at the underlying
data, it’s even worse. Let’s turn to a recent letter from my good friend and
favorite data maven, Greg Weldon. (www.weldononline.com)

Japanese exports have fallen 54% in
the last 6 months, an average of $40 billion a month, or down over a quarter of
a trillion dollars. Greg notes that past 6-month changes in exports in Japan
were hardly ever up or down more than a trillion yen. This is four times that
level, about 4 trillion yen. To get a visual view, look at the graph below.
That is called falling off a cliff.

The decline in exports is about 45%
year over year. Japan is one of the countries that has run a very large trade
surplus, allowing them to buy lots of dollars and lend a great deal of money.
Their banks have been an engine for growth worldwide, but especially in Asia.
And the graph below shows that trade surplus turning into a large trade deficit
of 952 billion yen, or somewhere over 9 billion dollars.

To give that some perspective, the
US trade deficit came in today and was “only” $36 billion, the lowest level in
six years, mainly due to lower oil prices, as our exports have been shrinking
as well (more on that below). The US economy is roughly three times the size of
Japan’s (and Japan is the world’s second largest economy); so $9 billion is no
small sum of money, relatively speaking.
(Quick note - while looking
for that number on the web, I came across this tidbit in the China Daily. They project that the GDP of
China will surpass Japan’s next year.)
Inventory-to-shipping ratios in
Japan are rising by over 50%, as industrial production is down more than 10%
and likely to fall much further. Japanese auto exports are down 63% in just
four months. Auto exports have literally fallen off a cliff, as inventories
have doubled.
No surprise, Japan is promising
even more government support programs, and aid to industries of all sorts. This
from a government that has over 140% of debt to GDP, about twice that of the
US. And their rapidly rising credit default swap rate is not helping. Who would
have thought of Japan as a credit risk? Three years ago, almost no one. Now,
rates are 30 times higher.
Japan’s economy is driven by
exports. And those exports were crushed as the yen rose in buying power and
Japan’s exports became less competitive in the last quarter, with calls for
intervention to bring the yen back to a level where their industries can be more
competitive. Look at the chart below of the Japanese yen versus the US dollar.
(The moving average is 90 days.)

Note
that less than two years ago the yen was over 124 to the dollar, and fell last
quarter to below 87, and has risen back to 98 today. Think about the Japanese
auto manufacturer. Two years ago he could sell his car in the US (or wherever)
for $30,000 and get 3,750,000 yen. Today, that $30k only gets him a little
under 3,000,000 yen. Think his costs dropped 20%? Think he can raise prices 25%?
If you sell machinery, you are
competing with companies, countries, and currencies all over the world. If your
currency rises, you are less competitive, or your profits have to fall.
Japan has problems, and not just in
manufacturing. The population of the country is now literally shrinking, as
they have the highest proportion of elderly people and the lowest proportion of
children. By 2050, 70% of the labor force will have disappeared. While Toyota
is the world’s largest car company, auto sales in Japan peaked 18 years ago.
Supermarket sales have fallen every year for the last 11 years. This is a
country in a long-term decline, with massive debt. While there is still a lot
of economic power there, it is not the country of the future. Unless they
figure out how to grow their population, it will be a long slow slide.