Japan Tries To Regroup Forecast: Cloudy With A Chance Of More Clouds And Bad Weather

Japan issued a host of data today, as is its custom at month-end. Today we found housing starts rose, retail sales rose and so did industrial output. The gains in these series were not huge but in general Japan’s indicators beat expectations.

Still, Japan is in a world of hurt.

Its announced 'yen support' package launched yesterday did not reassure markets very much Although today's foreign exchange markets were a bit calmer, the equity market was in bad shape as it had to come to grips with the foreign exchange news, the economic news and the political news.

Today we discovered that Prime Minister Kan is going to face opposition, so Japan's already shaky political base is being rattled again. Japanese lawmaker Ichiro Ozawa has confirmed that he will challenge Prime Minister Kan for the ruling party leadership, despite talks that had been conducted which were aimed at avoiding a damaging split so soon in Kan's term of office. The two will compete in a party-based presidential election set for September 14. Mr Kan, who leads the Japan's Democratic Party, took office in June; he has barely had time to get his feet wet. Yet, if he is ousted from office, Mr Ozawa will become Japan's sixth prime minister in four years.

So is it Japan's politics that make the economy so bad or is it Japan's economy that makes the political turnover so severe?

Whatever the answer to that question it is undeniable that it will be hard for any economic policy to have much impact until markets know who will win this election.

Meantime, the economic data seem to have found a bit of a firm spot, at least in July. But on closer inspection that is an illusion or it's a bit of news taken out of context. The table of industrial output detail shows that despite the gain in output in July, June's drop was severe and not been overcome. The three-month growth rate for output is still negative and output trends have been showing sharp and steady decelerations from twelve-months to six-months to three-months. Manufacturing output is still some 13.5% below its past cycle peak. Japan's output, despite a rise in July, is losing momentum. The rising yen is certainly not helping.

Japan's retail spending is showing some firmness in the month as sales rose by 0.7% in July compared to 0.4% in June. Still the chart shows the story. Government programs had helped to boost spending early in the year. When those supports were taken away spending dropped but it has since 'caught on' from a lower base as monthly growth has turned positive. It is hard to say that the retail sector is doing much more than hanging in there although the last month's spending figure was solid.

While Japan's housing starts rose in the month, permits have withered so that report too shows some optimism but then takes it away.

We are back where we started with Japan. Japan has hit so many bumps in the road it is hard for it to get untracked. It suffered a 'lost decade' but then it still did not 'find' itself. It has not had a steady hand on the tiller either, as leaders have come and gone with no time to set any firm course in place. Japan's dire economy keeps knocking the politicians out of office; their inability to do anything but 'fight fires' leaves the country powerless to pursue its long term need of debt-reduction. At the same time it is in the grip of, or perhaps optimistically only on the cusp of, deflation. The strong yen is both a symptom and cause of Japan's problems. As a major trading nation Japan needs world growth and it needs to sort out its exchange rate mess.

Japan's problems are too many for its economic structure to be able to handle them alone. It is caught in a cross fire of sorts as its two main trading partners China and the US are circling each other in a cautious yet dangerous rivalry. Japan is not alone as a country that depends on world trade. China's growth is also trade driven. Germany continues to have success in an economy that is so export oriented. But these nations have more options. Japan seems to have almost run out of things to do. Its political mess has certainly added to the sense of impasse.

Japan's yen is caught up in these issues and Japan's leaders have not been able to come up with a policy that the markets find credible. Despite Japan's structural debt problems and its deflation struggle, its most pressing near term problem is getting growth going and there are few options available. So while Japan did have a pretty good day for economic data it was not a day that changed anything important very much- apart from on the political front where uncertainty got worse. A cloud hangs over Japan and it will be there until at least mid-September and then Japan will be free to ponder its next step and to deal with a new cloud of uncertainty.