Japan's Releases Weak Economic Data

It was always clear that consumer spending would drop in the wake of the recent sales tax hike in Japan, as some of the spending was dragged forward by consumers trying to beat the deadline. However, the latest Japanese data releases show weakness in factory output as well. In an odd similarity to the US economy, Japan has exhibited a tendency to release both strong and weak data in close succession. In other words, it is difficult to discern a clear trend. Japan's labor market has become extraordinarily tight, an effect that is due to the combination of BoJ pumping (and the bubble activities it engenders) and the country's demographic trend.

'Inflation', i.e., consumer prices, appear to be the only thing that is in a fairly strong uptrend (by Japanese standards anyway). We can therefore remain fairly certain that real incomes continue to decline. Considering the aging population with ever more people relying on some sort of fixed income, the BoJ's inflationary policy makes even less sense in Japan than elsewhere. For unknown reasons rising prices are hailed as a 'success'. We know of approximately 127 million Japanese consumers who would disagree.

In fact, it feels totally bizarre to read about this every time. Consider the formulation in the excerpt from Reuters below: “Nationwide consumer prices showed that inflation picked up in April, excluding the April 1 sales tax hike – a welcome sign in the Bank of Japan's battle to bring inflation to 2 percent.”

A central bank 'battling' to increase inflation? It is a 'welcome sign' when consumer prices are rising? All we can say to this is that it proves that world has gone mad and that there is nothing more absurd than the economic theories on which modern central banking is based.

“Japan's household spending in April fell at the fastest rate in three years in a sign that consumption could be slow to recover from an increase in the nationwide sales tax, raising questions over the pace of economic recovery.

Industrial production fell more than expected in April as companies cut output to avoid a pile up in inventories in the lull after the sales tax hike took effect.

BOJ officials have repeatedly said they are confident spending will quickly recover as the labor market remains tight, but the bigger-than-expected spending drop in April and a slowdown in factory activity could raise the stakes for monetary policy.

"Spending will recover from May, but sales of durable goods look weak and this could be a drag on overall spending," said Hidenobu Tokuda, senior economist at Mizuho Research Institute.

"The government can afford to let the spending in its stimulus package run its course. The BOJ doesn't need to move now, but it needs to keep an eye on the situation."

Japanese household spending fell 4.6 percent in April from a year ago, more than the median market forecast for a 3.2 percent annual decline. That marked the fastest annual decline since March 2011, when an exceptionally powerful earthquake triggered a nuclear disaster.

Compared to the previous month, spending tumbled by a record 13.3 percent in April, more than the 13.0 percent decline expected by economists.

Government data published with the new figures show that household spending fell further after the April 1 sales tax hike than it did after the 3 percent sales tax in was imposed in 1989, and when it raised the tax to 5 percent in 1997. In both 1989 and 1997 spending remained flat after the tax was imposed and then increased.

Nationwide consumer prices showed that inflation picked up in April, excluding the April 1 sales tax hike – a welcome sign in the Bank of Japan's battle to bring inflation to 2 percent.

Japan's core consumer prices jumped 3.2 percent in April from a year earlier, the fastest gain since February 1991 as the sales tax hike boosted prices across the board. The increase in the core consumer price index, which excludes volatile fresh food prices but includes oil products, compared with economists' median estimate for a 3.1 percent rise, the Ministry of Internal Affairs and Communications said.

[…]

Industrial output fell 2.5 percent in April, more than a median market forecast of a 2.0 percent fall.

The BoJ tries to imitate John Law, but not very successfully so far, as Japan's year-on-year money supply growth rate has recently once again declined to just below 5%. Still, the recent pace of money supply growth was certainly high compared to recent history, so it is fair to assume that it is affecting economic activity in Japan.

Below is a recent chart of Japan's TMS-1 annual growth rate (currency plus demand deposits). The BoJ has managed to drive the y/y growth rate to nearly 6% at year end 2013, which is fairly high historically. Prior to the 1989 bubble peak, Japan's money supply growth rate was often in the double digits, but since then it has been quite low, as growth in inflationary lending by the banking system has come to a halt.

Japan's y/y money supply growth rate (TMS) – click to enlarge.

The next chart compares the Nikkei to the yield on the US ten year note, as well as to the yen, with 40 day correlation coefficients shown below both. As can be seen, there is a quite consistent positive correlation between the Nikkei and US bond yields and an even more robust negative correlation between the Nikkei and the yen. The positive correlation of the Nikkei with the US 10 year note yield suggests that Japan's stock market could get into trouble, although short term support in the Nikkei has recently held. Conversely, should US bond yields rise again, the Nikkei would likely rally.

The Nikkei, the 10 year treasury note yield (purple line), the yen and the 40 day correlation coefficients between the Nikkei and the other two data series – click to enlarge.

Japan's population since 1872, and population projection until 2100 - click to enlarge.

Conclusion:

The point of the BoJ's monetary pumping continues to elude us.

Charts by: stockcharts, BoJ, wikipedia