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Economy in Brief

Japan Sector Indices Flounder
by Robert Brusca  January 17, 2013

The incoming data from Japan underline why Japan is finally trying to get something going to move its economy ahead. It's not that the current economic progress is glacial; it's that the economy is still weakening.

The sector indices show that even construction (that lags by one month) is weakening. Moreover it resides in the 43rd percentile of its five year range at a time that Japan should still be bursting with activity to rebuild in the wake of the tsunami damage. For some reason, that just has not happened and its rebuilding activity is progressing at a very slow crawl.

Industrial output for mining and manufacturing is still sinking at a relatively rapid pace. The new sucker-punch to this sector is, of course, the conflict with China. But its ongoing weakness explains why Japan wants to use its exchange rate as a policy instrument to spur output. But Japan is not alone in this desire and it may have depended too much on it in the past to get much sympathy for renewed interest now. This is despite the fact the yen is most decidedly overvalued and is an impediment to Japan exporting.

Over the years, Japan has used every trick in the book to keep its exports strong, including outsourcing. Japan's outsourced shipments are still recognized as penetration from Japan even though they create many fewer jobs for Japanese. In addition, of course, Japan's growth challenge is worsened by Japan's shrinking population. Its trade need is worsened by its sudden abandonment of nuclear power and need for fossil fuel imports. And in the end these are Japan's home-made problems and are things for which the rest of the world is not responsible.

Japan's tertiary index level (a gauge of the services sector) is only in the 87th percentile of its five year range. That the Japan indices are not near high points of their respective ranges after five years is a sad testament to how weak Japan's growth has been. That the industrial sector is turning lower and is locked in a rapid decline is almost stunning.

But finally there is new life at the central bank which will shed its fear of asset bubbles and set its sights on reversing Japan's great ongoing economic contraction. Japan's new administration is going to engage in more stimulus too, and will take the risk of piling on even more debt. Japan will need a weaker exchange rate to make these policies stick, but will probably get some accommodation despite the very crowded field among countries seeking export-led growth especially in comparison to the amount of domestic demand there is out there to be tapped. In the end the US and Japan are close allies and the US can see Japan's need.

The world economy has become a captive of its own past excesses. Rather than getting balanced growth the global economy developed along the lines of some very oddly unsustainable specialization. Some countries exported at the cost their own development, like China. China's consumption as a share of GDP plunged so it could keep wages low and create new low-paying jobs and ship more stuff to America, the consumption-specialist country.

Japan has long depended on export led growth but as a global insider and country that looked for its place in the global hierarchy, Japan bent to pressure and suffered though orderly marketing agreements to limit its exports at times and then suffered through a horrific strengthening of the yen to undercut its voracious competitiveness. Instead, of cutting back on exports Japan's firms fought back, trying to hold onto market share with mechanization and outsourcing, making the problems worse for itself. Eventually outsourcing, productivity and several global disasters have put Japan on the ropes.

China by comparison played its hand as an outlier and exploited it vastness and its unique position as an economy with some vast and highly developed regions but also with a core of abject poor. The world powers never learned how to deal with two-headed China and its obstreperousness. China refused to do the sorts of things Japan had done; in part China had learned a lesson from Japan. And like Japan China was determined to exploit demand overseas to fuel its development at home and to build an industrial base.

But now everyone is in the same soup and the way out is either not clear, or at least, not on the table. Japan has responded to its pressures by finding many of its young and most able people not wanting to form families choosing instead to preserve their personal standard of living. This choice is robbing Japan of population and economic growth. As one of the most homogeneous countries in the world Japan does not to push for immigration to solve its growth problem. Getting stimulus to stick in this environment will be even more difficult. Since Japan is already so indebted, slower growth is a burden and stimulating growth by accumulating more debt is a risk. But there it is - a tough choice.

Japan does not really have a cohesive solution, but it does have a plan. It is not alone in its need to change its ways. Indeed, change is hallmark of our times. So many countries need to shift their course. And amazingly there are still important forces in countries around the globe that cannot see that this same-old, same-old, way of kicking the can down the road is a non-starter. For now Japan is headed in a new direction. At least it has a chance.

Key Japanese Sector Surveys
Raw Readings of Each Survey Percent of 5Y Range
Nov-12 Oct-12 Sep-12 Nov-12 Oct-12
Business Activity (METI:Indices)
All Industry Index #N/A 95.9 95.7 #N/A 72.8%
  Construction #N/A 77.0 78.8 #N/A 43.0%
  Industry 86.4 87.9 86.5 55.4% 60.9%
  Tertiary(serv) 99.1 99.4 99.3 87.9% 87.1%
LEI 91.6 93.2 93.0 80.4% 86.5%
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