It is time again to look east to Nihon the land of the rising sun as several of our main economic themes are in play there this morning. Of course with a Japanese twist. We can start with the latest economic growth figures.
Japan’s economic growth in the April-June quarter fell short of analyst forecasts, with weak consumer spending and a drop in corporate investment dragging the number down.
Government data on Monday showed that the country’s real gross domestic product grew 0.3% from the previous quarter, for an annualized rate of 1.1%. (The Japan Times)
In fact domestic demand fell by 0.7% as they would record it (annualized) so we are back in the arena of weak domestic demand. The breakdown continues in the same direction as exports rose by 2.1% and imports fell by 6%. So we are hammering home the theme of exporters struggling with domestic demand which is reinforced by the sharp fall in imports. Also one needs to look deeper into the import decline as Japan must be paying much more for energy so I am pretty sure there is a statistical quirk in play here.
Japan has tapped oil reserves and diversified supply to reduce reliance on oil from the Middle East.
We seem to come across statistical quirks in GDP numbers more and more these days don’t we?
There is also another feature of the numbers that will be familiar to regular readers.
Analysts polled by Reuters had projected that the annualized number would be about 2%, while in the first quarter, the economy grew 1.9%.
The surprise result could affect the rate outlook and ultimately the yen, (The Japan Times)
If the forecasters were archers then you should stand well away from the target as there are plenty of misses some of them rather wide.I have long thought that the use of the expenditure version of GDP is a factor in this. Canada also uses it but I note it also brings in the income version which may add some stability.
Nominal GDP
One way of looking at Abenomics is that it planned to drive nominal GDP higher and as we are in what we have called Abenomics 2.0 then this will please Japan Inc.
The Cabinet Office announced on the 17th that Japan’s gross domestic product (GDP) for the April-June quarter increased by 4.8% in nominal terms compared to the previous quarter, based on an annualized growth rate assuming the current growth continues for a year. The real amount reached a record high of 687.7182 trillion yen in nominal terms on an annualized basis. (Nikkei)
Whilst there is a lot of concentration on real GDP there is much less on nominal GDP. However it is the crucial number for debt metrics as most debt is conventional or if you prefer paid in Japanese Yen or nominal. A past problem for Japan was that The Lost Decade saw nominal GDP essentially singing along with Talking Heads.
We’re on a road to nowhereCome on insideTakin’ that ride to nowhereWe’ll take that ride.
Let me hand you over to Investopaedia.
Abe’s program consisted of three “arrows.” The first was printing additional currency – between 60 trillion yen and 70 trillion yen – to make Japanese exports more attractive and generate modest inflation—roughly 2%.
Now let me hand you back to Nikkei this morning.
Although real personal consumption and capital investment were negative, inflation is driving the increase.
An element of Abenomics was inflating away the debt.
Nominal growth has been positive for nine consecutive quarters. Rising prices and the normalization of the economy from the COVID-19 pandemic are driving the continued expansion of nominal GDP. The government envisions expanding GDP to nearly 1,100 trillion yen by fiscal year 2040 through public-private investment totaling 370 trillion yen.
Almost anything might happen by 2040. But the theme here is of the Japanese turning rather British in the sense of inflating away the debt. Sadly there is no song like Turning Japanese for this. There are a couple of nuances to this because like with the plan for a lower Japanese Yen nothing happened for quite a while and then things suddenly moved. Next Japan has essentially been deflating the holdings of The Tokyo Whale or Bank of Japan. An issue I cover regularly so I will now move on.
We get another conformation here.
Rising prices are boosting nominal GDP. The GDP deflator, which indicates the overall price trend in Japan for the April-June quarter, rose 2.6% compared to the same period last year.
Japanese Bond Yields Rise Again
Let me hand you over to the Japanese owned Financial Times.
Japan’s 10-year bond yield has hit a three-decade high, approaching the closely watched 3 per cent level as a weak yen fuels inflation concerns and investors bet on an interest rate rise next month.In
The reference to 3% relates to this.
Shoki Omori, an analyst at Deutsche Bank, said 3 per cent was “a critical defence line for fiscal credibility” because it was the assumed interest rate in the government budget.Hitting the 3 per cent level “would signify an interest rate rise unforeseen by the government”, he said.
If we now return to the real world rather than forecasts we saw this earlier.
The benchmark 10-year government bond yield touched 2.93 per cent on Monday, reaching its highest point since 1996.
It has been a pretty relentless march higher and a factor is that bond markets have spotted this.
Traders and analysts said the rising yield reflected investors’ belief that inflation would accelerate because of a weak yen and high oil prices from the war in Iran.
There is some attempted spinning here to suggest it is a tactical thing, but as I explained earlier it is a strategic shift from Japan in terms of nominal GDP. After all economic growth is hard but inflation is easy.
This has a consequence in that your present fiscal situation gets worse.
Interest payments are projected at ¥21.6 trillion ($139 billion) in the year starting April 2029, up from the current year’s budgeted ¥10.5 trillion, according to a Finance Ministry document released Thursday……..
Overall debt-servicing costs are seen rising about 46% to ¥41.3 trillion during the same period. That would account for about 30% of total projected spending of ¥139.7 trillion in fiscal 2029, topping expected outlays for social security.
There are quite a few consequences here and indeed various nuances.The latter is something the modern world struggles with as things go increasingly bi-polar. By this I mean that the Japanese state wins with higher nominal GDP but loses with a consequence which is higher debt costs. Existing bond holders lose but new ones get what are in Japanese terms very high yields or if you could borrow The Tardis from Dr.Who you would need to go back to 1996.
Of course Abenomics also brought in another type of inflation.
Nikkei 225 “75,000 yen by year-end” Securities firms predict record highs, Citi forecasts 90,000 yen. (Nikkei)
Again nuance is required as if you have Japanese equities well done and enjoy your glass of Sake.But new investors face raging inflation…