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Wednesday, June 10, 2009


I suspect that Japan's situation is an exaggerated reflection of the global situation.

This Bloomberg article details the problem; while most projections are for the Japanese economy to show some small growth in the second quarter, the projected declines in capital spending and the continued decline in employment make it very likely that this growth will be short-lived. The most probable outcome is for a double-dip recession, with the second dip being much slower in rate of decline but extended.

I think you should read the whole article, but here are some highlights:
Bookings, an indicator of capital investment in the next three to six months, fell 5.4 percent to 688.8 billion yen ($7.1 billion) in April, the lowest since 1987, the Cabinet Office said today in Tokyo. Wholesale prices, the costs companies pay for energy and raw materials, slid 5.4 percent in May from a year earlier, the Bank of Japan said.
Still, only about half the nation’s factory capacity is being used, putting pressure on managers to cut costs and delay investments.

A survey published this week by the Nikkei newspaper showed that Japanese companies plan to cut capital spending by an unprecedented 15.9 percent this business year.
Capacity usage around 50%? That's a major overhang, and as more jobs are cut Japanese consumer spending is weakening. Japanese workers receive major shares of their salaries in the form of bonuses, and the projection is that summer bonuses will be 19% lower this year. The survey projected about a $1,000 drop in bonuses. Japanese consumer spending is generally about 50% of the economy, and has recently fallen about 2.4%.

For the first quarter of 2009, GDP dropped 15.2% annualized. Of course that cannot continue. That was the fourth quarter of contraction, and followed an annualized rate of contraction of 12.1% in the prior quarter. It would not be surprising to see a positive quarter or two, but failing a massive rebound (which does not seem in the cards), companies have to continue to cut investment spending and employees. This is the classic shelf effect, in which waves of contraction force other waves of contraction.

Currently, Japan seems to be entering another deflationary cycle, or perhaps sliding back into the longer cycle.

Update: Trends in India are questionable also. See this article about this spring's drop in bank credit. This is very inconsistent with the government's growth projections:
Bank credit came down to 16% for the fortnight ended May 22, the lowest since March 2004. Data released by the Reserve Bank of India (RBI) Thursday last reveals that bank credit has dropped by Rs 16,306 crore.

The growth of 16% as compared to 25% in the same period last year is discouraging for the establishment which hopes of an industrial rebound after more than six months of slowdown.

The disappointment is more because the credit growth has to be around 20% if the GDP has to grow to at least 6%, according to central bank estimates.

The Japanese have never cleansed their banking system of the dead assets left over from the eighties that caused the lost decade in the first place. Combine that with an almost-frenzied attempt by the government to spur spending, a desperate inflation of the money supply and decades of yen/dollar manipulation to keep Japanese exports competitive and you have a stew of disastrous potential.

The Japanese have gamed the system for so long now that they no longer know which end is up. It's a sort of Keynsian/mercantilist monstrosity reaching the end of its proverbial rope. Throw in an aging and shrinking population that just doesn't want to consume and we're witnessing an unprecedented economic experiment, indeed.
A quick comment but not on topic. I work for the Postal Service. Our volume in all classes of mail is dropping fast. I had expected to see a small increase
this past Spring since we are the low cost shipper,
but that has not happened. My friends that work
for FedEx and UPS claim that their volume has dropped even more dramatically. I do not think that FedEx's business model can withstand the combination of $2.50 gas and low volume for another 6 months.
Anon - I don't think it can either, especially since fuel prices are rising so quickly.

I also saw an article in which Fed-Ex was claiming that some bill in Congress was going to favor UPS over Fed-Ex.

Craig - Lord only knows about Japan. I agree with your comments for the most part, which is one reason why I am so unhappy to see the US take pretty much the same course.
Yes, we may be looking at the future of this country when we look at Japan. Our only hope is for some dramatic changes in Congress in 2010.
2 Japanese carrying $134 bil worth of U.S. bonds detained in Italy
Thursday 11th June, 06:18 AM JST

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