Can Japanese retiree sending make up for lost exports?

I'm reading Paul Krugman's book "The Return of Depression Economics" (which has been updated to include discussion of the current crisis). Krugman devotes a chapter to Japan and points out that strong exports ultimately pulled them out of their financial turmoil.

Now, just a few years later, Japan is scrambling with lost productivity due to the huge drop in exports. This week, Prime Minister Aso announced an unprecedented budget of $980 billion to inject money into the economy. The investment in social security and pensions seems directed at Japan's large population of retirees. The question is if the infusion of cash will be enough to ease the concerns of a particularly frugal segment of the population.



http://english.aljazeera.net/business/2008/12/2008122611729888367.html

China's piracy

China has been working toward modernizing their navy for years. Now Somalia's pirates have provided a legitimate excuse for China to flex its muscles and test foreign waters. Member nations of the U.N. Security Council have dispatched vessels to protect their commercial ships from the pirates, and they have asked fellow member, China, to assist.

The hijacking is a serious problem. Of the 100 vessels attacked off the coast of Somalia, 40 have been hijacked.

I suspect that once China enters the waters off the Horn of Africa, they will never leave. China has many African investments and trade relationships. China imports more oil from Angola than Saudi Arabia. These are relationships China wouldn't want its competitors, such as India, to enjoy too easily.

Obviously, the piracy issue is a serious problem, but I doubt China is going to leave African waters even if it is resolved.


http://www.cnn.com/2008/WORLD/asiapcf/12/17/china.pirates/index.html

Will Tokyo intervene? Low dollar bad for Japan

As the dollar continues to drop against the yen, American exports become cheaper while Japanese exports look frightfully expensive.

With yesterday's interest rate cut to near zero, the U.S. now has a lower rate than the Japanese rate of 0.3. The interest rate cut will likely cause Japanese investors to abandon U.S. investments. According the the Wall Street Journal (12/15/08), Japan is only behind China as the world's largest investor in U.S. Treasuries.

They're not the only ones bailing. Most investors see the dollar as weak and are selling them in order to buy other currencies. (Then again, whenever the stock market takes a hit, investors run to the relative safety of the dollar and yen).

The Fed's plan to stimulate growth is to use quantitative easing, which means they are going to pour more money into the economy, even at the risk of inflation. Many economists feel that contracting the economy later in response to inflation is easier than pulling ourselves out of a deflationary situation. So their goal is to nip deflation before it spirals down.

Japan used quantitative easing in 2001 when it created money to directly buy Japanese stocks, bonds and asset-backed securities.

Will Tokyo intervene as their exports become less competitive? With the dollar at 88.78 yen, I imagine we are going to see action from Japan shortly.




The best explanation I saw of quantitative easing is from the Wall Street Journal (12/17/08): "it tackles the quantity of money in the financial system rather than its cost (the interest rate). I also translates into an increasing supply of U.S. dollars, potentially putting pressure on the currency because of an oversupply."

Japan, China, S. Korea working together?

Can the economic crisis do what the past 60+years hasn't been able to do ... namely allow three WWII scarred countries to work together? Past meetings have been merely symbolic, with distrust tainting any real outcomes.

Saturday's Fukuoka, Japan, meeting was the first ever trilateral summit. Observers may have thought the meeting was vague, with promises for stimulating the economy and committing to no new trade barriers for the next year.

Yet, just the meeting alone is significant as the three nations, who have barely tolerated one another due to residual emotion and economic rivalries, came together in solidarity.

The most specific summit outcome is that Japan and China agreed to lend foreign currency to S. Korea. S. Korea has struggled the most with the crises. The three countries comprise 75% of the east Asian economy.

The next summit is scheduled for next year in China.




http://english.aljazeera.net/news/asia-pacific/2008/12/200812138361719177.html
http://www.nytimes.com/2008/12/14/world/asia/14japan.html
http://english.aljazeera.net/news/asia-pacific/2008/12/200812138361719177.html
http://hosted.ap.org/dynamic/stories/A/AS_JAPAN_TRILATERAL_SUMMIT_ASOL-?SITE=YOMIURI&SECTION=HOSTED_ASIA&TEMPLATE=ap_national.html

Japanese reinvestment

Sony may be cutting jobs, but in much of Japan, companies are investing in their businesses. It's a smart thing to do when no one else is doing it. To the Japanese, the long-term is key to decision making.

Conversely, even when times were good, American businesses were only planning from quarter to quarter (while the Japanese had a 5-7 year plan). I guess when U.S. CEO stock options and bonuses are based on quarterly results, that's what you're going to get.

Time will tell if the current Japanese investment, and innovation, allows them to pull ahead of the pack when the recession dust settles. Or perhaps they will swimming in costly overcapacity.

My bet is on the long-term view.






http://www.nytimes.com/2008/12/12/business/worldbusiness/12yen.html

Sony's job cutting

The job losses announced by Sony Corp's electronic division are not just temporary worker jobs. As part of their restructuring, Sony is eliminating 16,000 jobs worldwide -- 8,000 regular jobs -- and then, 8,000 temporary workers.

Surprisingly, Sony is laying off the regular workers first ...quite a shift for a Japanese company. This cut represents 5 percent of the 160,000 worldwide workforce.

As long as the yen remains strong, Sony, and other export reliant businesses, will keep hurting. Temporary workers will allow Sony to be flexible, which is a smart move. Overall, however, this will have a huge negative effect on consumer confidence as the Japanese become excessively concerned about the safety of their jobs.






http://www.yomiuri.co.jp/dy/business/20081210TDY01304.htm

Japan's Temporary Workers

One of the difficulties of managing Japan's 1990s economic crisis was their cultural reliance on lifetime employment. In Japan, workers devote their lives to their employer, as the company is more important than family. In return for their loyalty, workers are essentially guaranteed employment for life.

Japan ramped up temporary worker hiring in the 1990s and this employment shift was credited with helping to pull Japan out of their decade plus spiral. While helping the economy, it caused other problems. There's been a growing income divide that had been unheard of in Japan previously. (Temporary workers are paid 30-40% less than their counterparts). This divide started to cull a second class citizen mentality. Yet, many young Japanese expressed a preference for temporary work as it allowed them to dodge the responsibilities of full-time employees, such as working late each night.

Except, now that the economy is contracting again the temporary workers are the first to go.

At 3.7% Japan's unemployment rate is low compared to the U.S. rate of 6.7%. Both countries are expecting more layoffs in the upcoming months.



http://www.bloomberg.com/apps/news?pid=20601101&sid=ab4g.SY6x5dA&refer=japan
http://www.bls.gov/news.release/empsit.nr0.htm

Credit lessons

Most rural Chinese don't know what a credit card is. Yet, to make up for a drop in exports, the Chinese government is encouraging the population to spend to stimulate the economy. They may want to look to South Korea and temper their approach.

In 1999, S. Korea's government worked to get their tightfisted population to borrow and spend to grow the domestic economy. By 2003, S. Korean households had a $2,000 debt average.

Today, at 66% of gross domestic product, S. Korea's household debt is one of the largest in the world. The good news is the delinquency rate is low, a mere 0.5%.

Confucian influenced societies are proud of their habit of saving, and the disgrace of debt is enormous. Chinese farmers compete over who can save more of their income, sometimes saving two-thirds to one-half of their $2,200 annual income.

It'll be interesting to see how vigorously China approaches credit and spending as their economy contracts.




Sources:

http://www.time.com/time/magazine/article/0,9171,552170,00.html
http://www.nytimes.com/2008/12/03/world/asia/03china.html
Wall Street Journal, November 29-30, 2008, p. A5.

In support of China's rate cut

Why do I support the rate cut in China and not in Japan?

In China, the rate cut will act like it's supposed to and truly leave more money in people's pockets by lowering their interest payments. The rate cut ties in nicely with China's previously announced $586 billion stimulus package. This package, presented with clear goals, is understandable to the markets.

Japan's rate cut exacerbates the way investors treat the yen. Amateur currency trading has exploded in recent years as Japanese investors sought better returns than their own banks were providing. Known as the yen carry trade, the idea is to sell yen to buy higher-yielding currencies. It's been very profitable until the recent market downturn. Nervous traders started buying back yen and drove the currency value up, making exports more expensive. You see where this is going...

Even though interest rates around the world are lower, Japan is still one of the lowest, so I fully expect the yen carry trade to kick into high gear again soon.

It would also be helpful if Japan provided some clarity to their stimulus package...




Source:
Wall Street Journal, November 28, 2008.

China cuts rate and the markets soar

Asian markets ended the week up, which seems odd considering the horror in Mumbai and the unrest in Thailand.

According to the Daily Yomiuri, "The market is reacting very calmly to the terrorist attack," said Francis Lun, general manager of Fulbright Securities Ltd. in Hong Kong. "Investors in Hong Kong are still fixated on China's huge reduction in interest rates. There's bargain-hunting across the board."

There is a lot of optimism tied to China's most recent interest rate cut. By lowering the rate 1.08 percent, China took the largest plunge since the 1997 Asian crisis.

Plus there's been a lot of unemployment unrest in China and a government that wants to remain governing will be swift in addressing economic matters.


sources:
http://hosted.ap.org/dynamic/stories/W/WORLD_MARKETS_ASOL-?SITE=YOMIURI&SECTION=HOSTED_ASIA&TEMPLATE=ap_business.html

http://www.nytimes.com/2008/11/26/business/worldbusiness/26chinasteel.html?th&emc=th

http://www.nytimes.com/2008/11/27/business/worldbusiness/27yuan.html

http://www.businessweek.com/globalbiz/content/nov2008/gb20081126_344722.htm?chan=top+news_top+news+index+-+temp_global+business

China and the cyber war

I found this Aljazeera article disturbing- http://english.aljazeera.net/news/americas/2008/11/200811213360567505.html. It said the US-China Economic and Security Review Commission found that China has targeted "US government, defence contractors and US businesses" for cyber attacks. I would assume the US is doing the same thing to China, but it seems that China is further along.

In addition, according to the "Global Trends 2025" US intelligence forecast, the US global economic dominance will diminish and give way to such rising powers as China and India.

According to the report, resources will continue to be scarcer as the impact of global warming is felt.
Of note, "the global shift from West to East in terms of wealth and economic power 'is without precedent in modern history.' Of a projected population increase of 1.2 billion worldwide by 2025, Western countries would account for only 3 percent.."
http://www.nytimes.com/2008/11/21/world/21intel.html?pagewanted=print

Other Source:
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/09/AR2008090903302.html

Japan's stimulus clarity needed

Japan officially acknowledged that the country is in a recession; its first since 2001. The decline in gross domestic product from July-September was the second consecutive quarter of negative growth -- meeting the definition of recession.

With an export-reliant economy, the corporate earnings projections aren't very rosy. The dependence on outside demand puts a spot light on Japan's need to stimulate its domestic economy.

Japan learned a great deal of lessons from the 90s and corporations have made tremendous improvements to their balance sheets. The Daily Yomiuri reported that the impact of 2007 troublesome domestic issues were acknowledged. Jesper Koll, CEO of hedge fund Tantallon Research Japan said "the domestic economy began faltering in the summer of 2007 under higher taxes and a credit crunch in the consumer finance industry. Regulatory debacles, including a massive pension scandal and confusion over new construction regulations, added to the worsening conditions."

Japan's recession is projected to continue for a few more quarters, but not to the same level as the U.S. or Europe. If the government can inject more cash and clarity into their domestic stimulus, Japan should be able to pull ahead of their peers. But to increase domestic demand, the government needs to put cash in the hands of all its citizens and provide the leadership to empower them to spend.


Sources:
http://hosted.ap.org/dynamic/stories/A/AS_JAPAN_MARKETS_ASOL-?SITE=YOMIURI&SECTION=HOSTED_ASIA&TEMPLATE=ap_national.html

http://hosted.ap.org/dynamic/stories/A/AS_JAPAN_ECONOMY_ASOL-?SITE=YOMIURI&SECTION=HOSTED_ASIA&TEMPLATE=ap_national.html

Note: the yen closed Friday at 97.20 yen to the dollar.

Japan disappoints

It looks like Japan is playing games with how to distribute the cash benefits from their newly announced stimulus program. They had promised $20 billion to be spread among all the households in the country.

Yesterday's announcement that the government doesn't plan to set income cap limits for payout eligibility seems innocuous. But when Prime Minister Aso added that he preferred that high income earners voluntarily decline to file applications with municipal governments, I smelled trouble.

Without an income cap indicator, middle to high income earners are going to be put in a bind. Culturally, it would appear unseemly for them to show up at their municipal government office looking for a handout. This is unfortunate and will severly lessen the impact of the stimulus. This middle ground of earners are exactly the group who would spend the extra cash and impact domestic growth. The plan had meant to distribute 2 trillion yen into the economy by giving 12,000 yet to each adult and 8,000 yen to those under 18 or over 65.

And Japan could use the stimulus. Despite a large amount of cash reserves, imports have surged past exports. Imports are largely affected by oil as Japan is nearly 100% dependent on oil imports.


According to the NY Times (11/10), "exports to the United States dropped 10.9 percent and those to the European Union also fell 9 percent in September. Asia-bound shipments grew just 2.8 percent in the month. Exports alone account for about 18 percent of Japan's economy."




http://www.yomiuri.co.jp/dy/national/20081111TDY01303.htm
http://www.washingtonpost.com/wp-dyn/content/story/2008/10/30/ST2008103001994.html

China steps up to the plate

China, the world's fourth largest economy, announced a 4 trillion yuan ($586 billion) stimulus plan. This is equivalent to about a fifth of China's 2007 $3.3 trillion gross domestic product.

The Chinese are sending a message to the world that they are doing their share and are important players in the world economy game. And they are doing a much better job at it than the U.S.

The money comes from "state banks and state-owned companies that are encouraged to expand more rapidly instead of from central and local governments (NY Times 11/10). With the bulk of the two year investment in infrastructure, they'll be ready to chug along their new rails, roadways and airports when the economy picks up.

Additionally, investment in low-cost housing, health care and agricultural subsidies are being planned. An important tax revision, called the value-added tax will allow companies operating in China to deduct spending on capital equipment (WSJ 11/10) Encouraging business investment will put China in a competitive position.

The U.S. package is shrouded in vagueness. Congress agreed to $700 billion to help strengthen banks, but does not direct the financial institutions to provide new lending or invest in U.S. projects.

The markets in Asia and Europe responded enthusiastically on Monday. The US market didn't fare as well. Maybe because the Chinese package was everything the US package isn't. It's clear and focused. It's investing in infrastructure. It's a lot of money backed by a time table and resources. And there's no question that China can pay for it as they sit on a pile of cash reserves.



Sources:

http://www.nytimes.com/2008/11/10/world/asia/10china.html

http://hosted.ap.org/dynamic/stories/A/AS_JAPAN_CURRENT_ACCOUNT_ASOL-?SITE=YOMIURI&SECTION=HOSTED_ASIA&TEMPLATE=ap_national.html

It's not the bottom

Asian markets closed mixed today as they waited for new economic data from the US. That data arrived and it's not good. The unemployment rate is 6.5%, a 14 year high. Add that to terrible October retail sales reports and I'm guessing Monday is not going to dawn on the up side.

Additionally, the New York Times reported today that China's "three engines of growth - exports, investment and consumption - have all slowed down." Not only are real estate and related industries down, but due to poor orders from retailers, factories are laying off workers. The Chinese economy is still expanding, but at a rate of 5.8 percent instead of last year's 11 percent.

The Chinese government, always wary of the restless unemployed, is putting together an economic stimulus package including infrastructure, exporters and aid to real estate, stock markets.

In Japan, Toyota Motors Thursday announcement that they had cut their annual profit forecast in half made a big impact. The Nikkei fell 3.5 percent.


Sources: http://www.nytimes.com/2008/11/07/business/worldbusiness/07yuan.html
http://www.nytimes.com/2008/11/08/business/08markets.html

Japan's interest rate cut

I was surprised by Japan's central bank decision to cut their current rate of 0.5% to 0.3%.

It's true the domestic market never completely recovered from the 1990s. The rate cut was explained as a way to ease the credit crunch (small business has complained of difficulty in getting loans) and as a sign to global markets that they were a player in the world response (the US S.Korea, China, Hong Kong and Taiwan also cut rates this week). But 5% drop in the Nikkei on Friday seemed to deem the gesture ineffective, although the market had surged 10% on Thursday in anticipation of the news.

What is likely to do more for the economy is the 27 trillion yen ($275 billion) stimulus package announced Thursday by Prime Minister Aso. The credits for small businesses and a cash payback to every household should have a short term effect.

Yet Japan has to do something to respond to the rising yen, which drives their export-driven economy down. The reason I was surprised by the interest rate drop is because the rise of the yen correlates to investors borrowing yen at its perennially low interest rates* and then make a killing investing that same money in other currencies. This works when the markets are stable, but now they are divesting those other currencies and buying back yen, thus the surge in value.

Japan's banks are still sitting on a big stash of cash, but interestingly, one weak spot is their traditional practice of "cross shareholding", "where banks and their borrowers hold stakes in each other to cement ties" (WSJ 10/28/08). These holdings by Japanese banks are 3% of the stock market and were hit by the huge decline in stocks (40% since June). Yet Japanese banks are not expected to report losses and recently bought stakes in Lehman Brothers Asia and Europe, Morgan Stanley and Union BanCal Corp.

I've been hearing that the next US shoe to drop will be credit card debt. This would not be an internal Japanese problem because individuals rarely use credit cards. To function best in Japan, you need travel with cash.

* The interest rate was only raised to 0.25% in July 2006 and to 0.5% seven months later in February 2007. Today's rate cut is the first time since March 2001. There was a five year stretch when the interest rate was held at zero.


Sources: Sources: http://www.nytimes.com/2008/11/01/business/worldbusiness/01japan.html

http://hosted.ap.org/dynamic/stories/A/AS_JAPAN_CENTRAL_BANK_ASOL-?SITE=YOMIURI&SECTION=HOSTED_ASIA&TEMPLATE=ap_national.html

New strength - the yen and dollar

The result of the global stock markets dropping like a rock (the Nikkei hit its lowest level since April 2003, falling 9.6 percent to 7,649) is that investors are running to the dollar and yen as safe havens.

Being dumped are the emerging-market currencies. South Korea is looking particularly vulnerable (the Kospi lost over 50 percent of its value this year).

The new strength in the yen is not good for the export-reliant Japan and many companies (notably Sony) slashed their projections for the year. Exports were a bright spot in the U.S. economic picture and a strong dollar is going to spell trouble for that as well.

But the real concern is the flight from other currencies.

“When a developing country’s currency loses value rapidly, it impedes the ability to pay back loans from Western banks. That could cause a rash of corporate or even government defaults — a feature of previous financial crises in Asia and Latin America.” http://www.nytimes.com/2008/10/25/business/25currency.html

These concerns are leading industrial country policy makers to talk about a coordinated effort of central banks to sell dollars and yen and buy other currencies.

China's ability to fill the gap

A lot has been said about China's recent growth. Some have been hoping that with the U.S. slowdown that demand from China would be enough to fill the gap and keep the global economy humming along. But China's not there yet. Far from it.

Last year, China's 1.3 billion population individually consumed $ 923 (on average).

In the same time period, the U.S. population of 300 million individually consumed $32,000 (on average).

That's a $31,077 difference. That's like hoping my kid will use his allowance to make our mortgage payment.

China's slowing economy

China is experiencing the slowest growth in five years, the New York Times reported this weekend (Oct 19, 2008). Declining exports, a weak real estate market and closed factors due to the Olympics contributed to the 9 percent third quarter slump.

"But China has more options than most countries to cope with slower growth. For starters, inflation is slowing at the consumer level — the government said on Monday that it was 4.6 percent in September, down from 4.9 percent in August and the fifth monthly decline.

With less to fear from rising prices, China’s central bank has already begun reducing regulated interest rates and loosening restrictions on bank lending. With the government running a large budget surplus, the finance ministry has begun lowering taxes on stock and real estate transactions and on exports of textiles and electric machinery."

Anna Schwartz interview

In an interview with the Wall Street Journal (Oct 18, 2008), economist Anna Schwartz warned that the Fed's response to the current financial crisis in inappropriate. She commented that the Fed is acting like the problem is about a lack of money to lend (which is what led to the Depression). The real problem, she says is "the lack of faith in the ability of borrowers to repay their debts."

The Fed keeps throwing money at the issue and meanwhile, the "banks don't know who is still solvent and who is not."

Secretary Paulson's move away from buying bank assets and toward directly recapitalizing them, means a shift from "trying to save the banking system to trying to save the banks." Rather than keeping badly managed and capitalized banks afloat, they should be allowed to fail so that healthy banks can prosper.

Letting Lehman Brothers fail was the right thing to do, but by then the government had saved so many others, "the markets didn't know how to react. Instead of looking principled, the authorities looked erratic and inconstant."

Hong Kong bankers appear to agree with Ms. Schwartz. The Wall Street Journal reported (Oct 18, 2008) that they will buy the Lehman Brother derivatives (known in Hong Kong as minibonds). The public is angry about the move and the bankers are using independent auditors to determine the market value of the minibonds.

But the minibonds are assets, no matter how bad they are, they are still assets. This should allow the strong banks in Hong Kong to move forward even if the weak ones won't.

It's a wild ride - and the Japanese feel like buying

Yesterday, Japan's Nikkei stock index fell 1,089 points or 11.4 percent, which was the largest drop since 1987. Today it gained 235 points, or 2.78 percent. The final number was just over 8,693. A few weeks ago the index was over 12,000. Investors know that the stocks are undervalued and there's bargains to be had, but just like everywhere, they are a little scared to jump in.

Citing the need to help take the edge off high fuel prices for farmers and fishermen, the Japanese parliment approved US$18 billion (1.8 trillion yen) to partially finance an economic stimulus package. Japan had actually crafted this stimulus proposal in August before the US financial crisis hit.

The general consensus is that Japanese investors are calm, concerned, but calm. And they are feeling good because they have a lot of money. Estimates put domestic household financial assets at $15 trillion, and half of that sits in bank deposit accounts. The Japanese are among the world's biggest savers and now they are thinking about buying.

Some Japanese politicians are suggesting that Japan invest in U.S, troubled assets. Japan has a great deal of cash, and obviously, the U.S. does not. The idea was couched in the terms of helping a needy ally. Of course, they would profit by holding the assets long term, especially after scooping them up at fire sale prices.

The Daily Yomiuri reported that the private sector was already on a buying spree. "Nomura Holdings bought the Asian and European divisions of failed investment bank Lehman Brothers. Mitsubishi UFJ Financial Group completed its US$9 billion purchase of a 21 percent stake in Morgan Stanley this week."

Understanding the global crisis

Here are some great news stories that piece together what's been happening globally and how the dominos started falling.

Fed, ECB, Central Banks Cut Rates in Coordinated Move ... The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each reduced their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. China's central bank separately cut its key rate 0.27 percentage point.... http://www.bloomberg.com/apps/news?pid=20601087&sid=aKj1Uvn3ofpo&refer=home

Agency’s ’04 Rule Let Banks Pile Up New Debt ... Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.

On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks... http://www.nytimes.com/2008/10/03/business/03sec.html?ei=5070&emc=eta1

Pressured to Take More Risk, Fannie Reached Tipping Point ... An inside account of the critical juncture when Fannie Mae’s new chief executive, under pressure from Wall Street firms, Congress and company shareholders, took additional risks that pushed his company, and, in turn, a large part of the nation’s financial health, to the brink.... http://www.nytimes.com/2008/10/05/business/05fannie.html?pagewanted=4&em

Swedish Spoken Here ...… Even though the dollar has strengthened a bit lately, we are going to need foreigners and sovereign wealth funds from China, Asia, Europe and the Middle East more than ever to survive this crisis — and they are going to need us to be healthy as well. In the process, we are going to become even more intertwined and dependent on the rest of the world.... http://www.nytimes.com/2008/10/05/opinion/05friedman.html?em