Japan’s central bank intervenes to kick start economy

Following an emergency meeting on Friday, The Bank of Japan (BOJ) has revealed they will take action to boost the flagging economy and attempt to stem rising deflation.

The BOJ have promised an injection of over $100 billion into the economy by way of budget short-term loans to the nation’s banks.

They hope by doing this that banks will be more likely to increase corporate and private lending, but financial specialists are pondering whether this may simply be an empty political move rather than a genuine effort to prop up the world’s second largest economy.

“The general feeling is that the government have been prodding the BOJ to do something,” said Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management in his monthly newsletter to clients.

“The central bank’s position on financial issues hasn’t changed recently, so they certainly wouldn’t be doing this independently,” Lane added.

In an announcement following the meeting, the BOJ said the move would “act as a counterbalance and assist the economy back to growth.”

There seems to be no end to the government’s plans to kick start Japan’s economy, with further stimulus packages being prepared, totalling around 3 trillion yen, according to BBC reports.

Ten months ago, the outgoing administration spent nearly 16 trillion yen to stimulate the economy, which successfully diverted the nation away from recession.

Another sign that the recent move was more for political drama than anything else was the meagre amount of the package. Director at Mizuho International, Seijiro Takeshita, described the amount of extra funds as “negligible” and it was all about “political timing”.

Takeshita commented that there were far better ways for the BOJ to help the economy grow such as bringing down the borrowing interest levels or purchasing high yield bonds from the government.

However, Takeshita also said the move is a sign that the government is taking the financial crisis and Japan’s own decent into recession far more seriously than before.

It was a widely held view that the country would remain largely unscathed by the global downturn, but it is clearly now feeling a part of the pain the rest of the world community has gone through in the last two years.

Exports bring Japan out of the darkness

A 6.4 percent increase in exports has dragged Japan out of its most serious recession since WW2.

It is the nation’s first quarter of economic growth for over 12 months and GDP saw an annualized rise of 3.8 percent and a 1 percent rise compared to the previous quarter.

It is the first gain in exports figures since the beginning of 2008 and the largest gain since Q2 of 2002.

The news follows encouraging signs in Europe as the two dominant economies in the financial bloc, France and Germany, reported their first positive growth in the current quarter.

Many experts thought Japan would take years to recover from a dip brought on by plummeting foreign demand for its major exports, something Japan heavily relies on for economic success and the factor that has made Japan the number two ranked economy in the world.

The cautious optimism is being mirrored in other regions.

Contraction in the United States has been the smallest for 12 months at only 1 percent annualized last quarter. A 0.1 percent contraction was Europe’s most encouraging result for a year also. China’s growth, albeit assisted by a massive stimulus package
somewhere in the region of half a trillion dollars, jumped nearly 8 percent from last year.

Although the promises of the nation’s Prime Minister, Taro Aso, that their own economy would be the first to come out of the darkness seem to have been born out, it is thought by onlookers in the know that the recent recovery won’t be enough to keep him in the job following the next general election in 2 weeks’ time.

“The Lib Dems won’t survive,” says Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management. “Aso will be feeling good at the moment though. His stimulus package plan was mocked at the time but it has worked, and his cash hand outs and the incentives for green energy have provided the economy with many short term boosts. He is to be commended.”

Not everyone has such a positive outlook. The modest export-focused growth is great news, but the yearlong contraction that translated to over a 13 percent dip in annualized GDP in the last quarter of the year was a huge blow to the nation’s prospects.

The economic and fiscal policy minister, Yoshimasa Hayashi warned that a sustained recovery was not certain. “Employment figures are still poor and our production levels are in a trough,” he said. “We will need to work very hard to keep this recovery going and must be aware of the negative risks.”

Global meltdown has barely affected Japan

While London and Wall Street seems to be imploding in the current financial crisis, Japan looks to have been left relatively unscathed.

Japan has often been thought of as a somewhat isolated economy, sometimes being a negative characteristic for the world’s second largest economy, but the stark difference between the nation and the western world has never been more obvious than in this current financial storm, probably the worst since the Great Depression of the 30’s.

It seems like business as usual for Japan’s banking titans, who are looking on with a disconnected impassioned view while huge banking conglomerates in the United States and Europe teeter on the brink of destruction.

The looming credit crunch has not hit Japan yet, and possibly won’t at all with the country’s issue usually being the banks possessing too much cash rather than too little. The Bank of Japan, the county’s central bank, is unlikely to be mimicking the Federal Reserve with its huge bailouts of top institutions.

Indeed, the latest economic catastrophe is barely even making the news in Japan. There are far more pressing events taking up airtime than “Lehman Shock”, as it’s known here, such as a tainted rice scandal and an incoming typhoon weather system.

In Japanese political circles, where there is a race for a new PM coming up, the financial crisis is not high on the list of talking points.

This is not to say that Tokyo will be completely unaffected by the current troubles, far from it. The country will no doubt be threatened, at least, by a coming economic depression considering the nation is heavily reliant on its exports. Its stock market has also fluctuated and dropped this week.

However, Japan has so far escaped the turmoil that has gripped the rest of the world’s markets.

“The global downturn is viewed by the Japanese as an earthquake in a distant land, with only a ripple effect being felt here,” says Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management who manages over $5 billion of funds in the region.

“I’m not feeling the distress and anguish here that I observe happening over in the States or Europe,” Lane added.

Japan’s avoidance of the problems afflicting the rest of the world might be due to their wise handling of their debt in the 90’s. They seem to have lessened the build-up of subprime loans; a very risky key factor that most analysts agree has ignited the current crisis.

Japan says inflation is encouraging news for economy

As unintuitive as it may sound, Japanese economists are welcoming runaway inflation as it gives them the chance to foster heightened expectations of a long term jump in prices.

For the rest of the world inflation is bad news but for Japan, a quick rise in food and oil prices is being hailed as an indicator for a turnaround in the economy.

The nation’s headline inflation rate rose to the record level of 1.3 percent in the last fiscal year to March 2008, brought on by significantly increased prices for petrol, pasta and many other fuels and foods. For a country that has been in the grip of pronounced deflation over the past decade, that’s a pretty high level. The majority of central banks in developed nations would balk at anything outside the normal 2-3 percent range that they are comfortable with.

Not that increased prices are fundamentally good for the Japanese economy, they are not. You are going to get a lot less food for your yen now and both public and corporate consumers will have to tighten the belt. Apart from energy and food, inflation has remained at a relative status quo, rising only 0.1 percent in the last year.

This marked increase in headline inflation is, however, an opportunity because of its effect on real interest rates, pushing them steadily downward. If the nominal rate stays at half a percentage point then real rates will be negative, this in theory should spur economic activity in the marketplace and mould sentiment to expect prices to continue to increase.

“We have already seen certain indicators of expected inflation gaining steeply,” says Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management in a phone interview. “Jumps in prices for ice cream, theatre tickets and gasoline are felt straight away by the nation’s consumers. On the other end of the scale there is minimal effect from government bonds.”

Indeed, most Japanese experts will be hoping the inflation is sustained, but that will depend on increased wages and further trends in consumer spending. Wages currently look promising and are entering a positive cycle and will continue to influence matters as long as the Bank of Japan doesn’t meddle with interest rates.

It’s widely expected that the BOJ will not adjust rates, but economists want a guarantee that the current rates will go on in the future, at least until good inflationary expectations are solidified.

China improves trade ties with old foe

The Japanese finance ministry announced by way of press release on Thursday that the nation’s largest trading partner is no longer the United States, but China.

With Chinese trade totalling $220 billion in the year up to the end of March, China has overtaken the US for the first time since the war.

The boost in trade between the old foes seems to be due in large part to the outsourcing of manufacturing from Japan to China to take advantage of the much reduced labour costs.

The United States still runs a very close second, with the trade figure being around $212 billion.

The data represents a record high for the two countries, with Japan’s trade surplus expanding over 70 percent from last year, according to the report.

Increased exports to their neighbours combined with a slightly weaker yen boosted the surplus, which reached 1.652 trillion yen in January.

“Import trade from China is certainly much more attractive with the yen dropping, it makes the goods substantially more affordable,” said Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management. “The results released in the current report have totally eclipsed those previously forecast.”

Koichi Nose, a spokesman for the finance ministry said that the pattern of “expanding trade with our respected neighbours will continue into next year”

Nose added that the figures “show the extent to which many Japanese companies have shifted their work bases over to China.”

Cheap labour costs are not the only reason many Japanese firms want to move production to China, which is catching up Japan as the world’s second largest economy. Another huge bonus of being based in China is that no exportation is necessary in order to take advantage of the massive domestic Chinese demand for goods.

Michael Lane added that there is “a potentially game changing market developing next door, and Japan needs to invest heavily in order to maximize profits.”