Tag Archives: Japan

Japan’s trade deficit

Japan today posted a larger than expected trade deficit causing the Yen to fall .3%.  The trade deficit was caused by a larger than anticipated import growth of 18% for the month of March compared to a lower than expected 1.8% growth in imports.  Unfortunately, the growth in imports was drastically different from its 6.5% prediction.  As we have learned in class, a depreciating yen should increase the demand for exports.  Japan right now is facing too many outside issues with their goal to decrease their trade deficit. Unfortunately, the issues don’t just stem from domestic issues but also external issues.  Slowing demand in China and increased tensions between China and Japan has caused its exports to its largest trade partner, China, to decrease.  Just recently, China seized a Japanese ore caring ship due to Japan failing to pay wartime contractual obligations.  Japan faced its lowest export by volume numbers since June, much of which was caused by a drop in exports to China.  Another issues that Japan faces is due to the rise in the consumer tax on April 1st.  The knowledge that the consumption tax was going to rise to 8% caused demand to increase among Japanese consumers, causing many producers to delay exports to meet the demand at home.

While the data coming from Japan is bad, it doesn’t mean that Japan’s future outlook is in jeopardy.  The drop in the yen and Japanese consumer demand due to the increased consumption tax could increase the supply and demand for exports.  Rising labor costs around the world and the weakening of the Yen has brought Japanese producers back to Japan.  This would help the Japanese economy by increase local consumer expenditure and adding a slight bump to the economy.  One issue that many analysts have with Japan at the moment is that the quality of goods in Japan is falling behind, leading to a drop in demand for Japanese goods.  It seems that the lack of exports is a financial policy problem more than a monetary one.  Domestic firms in Japan are sitting on large stock piles of money instead of focusing on making Japanese goods more competitive.  Japanese firms hold as much as $2.1 trillion of cash and deposits.  Japanese goods are becoming more competitive due to the weakening yen but it isn’t enough to increase demand abroad.  Japanese firms aren’t being efficient enough to compete on a global scale.  A recent Wall Street Journal article states that Japanese firms hold onto less profitable operations longer than US companies, leading to a net profit as a percentage of revenue being 2.1%, compared to 8.5% in the US.  From this point of view, it seems that the problem that Japan is facing is less competitive firms than monetary policies.  I believe that the Japanese government needs to shift its focus to financial policies in order to jump start its exports.  The Japanese government could look into a R&D tax break, similar to the one that the US government in that past has used, to spur innovation and increase efficiency.  Japan could also reduce restrictions on small business from obtaining capital.  Japan won’t be able to rely on a weakening yen in order to decrease its trade deficit.

Japan seeks more control over gas pricing

LNG, short for Liquefied Natural Gas, is the artificial-converted liquid form of methane for convenience of storage and transportation. Over long-distance transmission, LNG is more efficient and economical than pipelines. After transported to certain destination, LNG will be retransformed into gas form and used directly or transported through pipelines.

As the world largest LNG importer, Japan inlets about 40% of total global LNG production, primarily from Malaysia and Indonesia. Last year the number hits a new record to 87.49 million tonnes, which is a reflection of soaring demand of LNG under the calamitous Fukushima nuclear plants failure in 2011. As a result, natural gas in Asia also hit a record last year.

Under situation like this, Japanese firms acted positively to seek for more say over the pricing of this crucial fuel. Comparatively, as I said before in my past blog, Japanese firms paid about $18 per million British thermal units, almost 5 times as that in the U.S. ($4 per mmBtu). One reason of this, as mentioned above, is the ever-rising demand for LNG in Asia (Korea is the second largest LNG import nation while China lies in the third). Another reason is the unsound spot market for LNG. According to WSJ, Japan’s government sees the creation of an accurate measure of the fuel’s value as a necessary step in making progress toward launching futures contracts by March 2015, a goal it announced last April.

As a clever move favored by Japan government, this plan has several potential benefits:

Benefit 1: help to smoothing price fluctuation. This is the main reason behind. Currently the natural gas prices expectations are uneven among suppliers and consumers. From the suppliers’ point of view, the impact of Fukushima disaster has its long-lasting effect over the domestic demand of LNG import. Also for security reason, Korea is shifting its reliance on nuclear generation plants to more LNG exporting. Thus the prices of natural gas have a strong upward trend. However, the recent launched natural gas exporting plan in US acts opposite to it. As I mentioned in my past post, US natural gas generators has less profitability now, so they have to increase export to reduce domestic shale gas supply. Also an Australia LNG project is under construction by Inpex, the largest Japanese gas distributor. If this planned LNG projects in Australia come on stream as scheduled, Australia will overtake Qatar as the world’s largest LNG supplier by 2020. All suggesting a future boost of natural gas supply in Asia, which implies a downward prices trend. Binding the downward trend and upward trend could cause a fiercer price fluctuation and loss for both suppliers and consumers. The establishment of LNG future market could flatten such volatility with the power of gas contract.

Benefit 2: With higher demand for LNG, surging gas prices drag consumers away to alternatives. Under that, coal import and consumption has been increased over the recent years, causing a serious environmental pollution in Japan. The development of new spot and future gas market can help to reduce price and then air pollution from burning of coal.

Benefit 3: The final goal is a healthy global natural gas market like crude oil market. It will definitely benefit world-wide consumers and global environment.

(Revised) New Chapter in Abenomics

For today’s discussion, I would like to a little bit about what some next steps the Japan had taken for its famous Abenomics. Japanese government increased the sales-tax from 5% to 8% today. There is no surprise here since this was part of Abenomics plan announcement well back in 2012. But, I do want to do a half-time check on how Japan is doing with its plans and see whether it really had a significant effects in dimensions of economics.

It is hard to talk about Japanese economy without discussing what we call the lost decade–which had continued to reach two decades soon. I already have a blog post on the lost decade, so please go here for more details. Anyhow, the short version is that after 1990’s real estate bubble, Japan has seen very low inflation rates or even deflation–staggering growth and sometimes contracting up until recent years.

The biggest problem with low inflation is that the economy becomes highly vulnerable to exogenous supply shocks. The central bank also loses control over its monetary policy instruments. Even with the lowest interest rate of 0% since way back, negative inflation will bring real interest rate to positive side, resulting in net capital inflow and loss in net export. Just a glimpse on the graph below shows very high volatility in inflation at the lower end.

Screen Shot 2014-03-31 at 6.07.00 PM (Source)

To make up for the big loss in exports and domestic private investments, the government had to spend a lot–and by that I mean A LOT (see graph below).

Screen Shot 2014-03-31 at 6.11.31 PM

The debt-to-gdp ratio was at about 67% and now the owe more than twice of their income. One of the things that Japanese government did when they faced the real estate bubble deflating was to spend a lot. How did this work out for Japanese?

In terms of today’s goals, this is part of Abenomics’ goal. Although they are still heavily indebted, they wanted to do the extra mega-spending in fiscal policy and even looser monetary policy in order to override the deflation they were experiencing.  The fiscal burden as you can see have been growing at a very fast pace. Japan also used very loose monetary policy, weakened the yen and made it stay there to restore some balance in the trades.

I want to give Abenomics some credit in restoring its economy. Although it went down 9% this year thus far, the Nikkei rose 57% last year. Also, it is on its way to reach the inflation target of 2% (now at 1.3%). On the other side, I think Japan is playing it very close to the line with continuing rise of the debt. Yes, they decided to raise the consumption sales-tax to 8%, but the condition for continued high confidence level is still very unpredictable. There has to be more of tax raise and other spending cuts in order to deal with the debt in the coming years, but it is still unclear whether the net effect of Abenomics would be positive.

Some pessimists like Gordon Chang is appalled by Japan’s approach and think Japan is undoubtedly going to default, causing massive financial crisis around the world. Other countries that are in international trade competition with Japan–countries like EU, South Korea, etc.–complain that it is very unjust for them to play the beggar-thy-neighbor approach.

I personally think that what Abe’s government did has no moral culpability per se. Ignoring the fact that Japan is still number 3 in terms of total nominal GDP, I think they used their last bullet in the gun to shoot for a comeback to their heydays growth level. They are running out of fiscal policy options with enough deficits in hand already. Monetary policy had been inoperative for many years and even more so now perhaps. To me it seems like Abenomics took the eat-a-lot-now-and-fast-later approach, and hopes that what they had eaten will last long after their fasting period. As Japan just begins their fasting period, they can only hope that their momentum will last

The Japanese Tax Hike on April Fool’s Day is no Joke

On April Fool’s Day, April 1st, Japan will increase its sales tax rate from 5% to 8%. This is the first time Japan has raised sales taxes in about a decade and a half. Interestingly enough, the Japanese economy has responded to this proactively. The Wall Street Journal and Washington Post both published articles about consumers and producers being proactive towards this tax hike. In the month of February, industrial production fell from the last month. This was due to bad weather, which hit the car industry the hardest. Before this, there was a surge in output since firms were trying to take advantage of increases in demand before the tax hike. The car industry is not the only one taking advantage of high pre-tax demand. Retailers used this as their chance to attract customers before sales taxes go up.

In a video interview in the New York Times, reasons why this tax hike is good are discussed. One reason is that Japan’s government is one of the most indebted in the world. The government needs more revenue to pay off pensions and health care, which are experiencing sharp rises in prices. Furthermore, the government needs more tax revenue to help with stimulus spending because the country needs to recover. The central bank also intends to increase its purchase of assets to help the economy recover.

In theory, this tax hike just might work. When the government has more money, it can do more government spending, which is the G component of the GDP equation (C+I+G+NX). This would help increase output for the country, thus helping the recovery. When the central bank buys bonds, interest rates decrease, therefore investment, the I component, will also increase. This could help add to the increase in output.

From a more practical standpoint, all that we can do is play the waiting game. Sure, one can make speculations that could happen. A Japanese super-market general manager believes that sales will decrease in the beginning, but will pick up again in the near future. I would say that this guess is about as good as anyone else’s. There is no way to predict how each person’s consumption patterns will react to this tax hike. As previously mentioned, all we can do it wait. All of that being said, I do think that this is a high-risk-high-reward decision. If consumption does not decrease by too much, or if it bounces back, then Japan can carry on wit its agenda to help its economy recover. If the country falls into a recession, then it could be in even more trouble than it is now. Consumption will decrease, therefore output will decrease. Plus, the government will generate less tax revenue, and it would not be able to help stimulate its economy. Japan would put itself into a recession.

 

Abenomics: Success or Failure

This is the third post I’ve written recently about Japan’s economic policy of Abenomics.  I figured I would revisit the topic due to two recent articles, one by the IMF and one by the WSJ, that analysis Abeconomics.  Both of the articles illustrate the difficulty that Abenomics will have if wages do not rise.  As I mentioned in earlier posts, unless there is an increase in wages, the economic growth that Japan has seen recently will slow down.  According to the IMF paper, the average Japanese worker has been funding their consumption by dipping into savings.  The savings rate, as a percentage of disposable income, in Japan has fallen from 5% to 0% todayThis means the most of Japan’s increased consumption is due to deficit spending, or spending more than the average worker is bringing in.  This is a huge problem because worker’s savings are a finite number.  This means that there is an upper limit on how high consumption can go.  Eventually, consumption will hit a peak and then start dropping if wages don’t increase.  Next years increase in consumption tax will place even higher pressures on consumers.

One reason that wages have failed to rise in the past few years is the increase in non-regular workers.  Non-regular workers are paid less and have less incentive to invest their human capital into firms due to the belief that they’re part time.  In the end, the firm is hurt by losing investments in human capital and production by hiring non-regular workers.  Abenomics - Time for a Push from Higher Wages 2

Abenomics “third arrow” is supposed to help solve the stagnation in wages.  Unfortunately, there hasn’t been much success in this area.  Japan’s government has used financial policy to try to increase wages with little success.  The Japanese government has offered a tax break for companies who’s labor expenses increase by 2-5%.  According to the WSJ article, the main reason why these polices aren’t helping is a lack of credibility among the Japanese government.  Critics don’t believe that the BOJ can hit their target inflation rate of 2%.  One of the few ways that the BOJ can reach the 2% target is another round of quantitative easing, even though critics claim this could lead to runaway inflation and a spike in interest rates.  From what we’ve learned in 411 though, the BOJ’s quantitative easy will only lead to runaway inflation and a spike in interest rates if they make mistakes.  I think the best thing that Japan can do to raise wages is to raise the minimum wage.  Japan has the lowers minimum wage out of all OECD countries.  A raise in the minimum wage would also lead to a decrease in non-regular workers, which would put upward pressure on wages and increase the efficient use of human capital by firms and an increase in productivity.

“Kurodanomics”

Japan has often been touted as the most successful recovery for a developed economy since the recession of 2008.  Many economists have laid the benefit of Japan’s recovery at the feet of Prime Minister Shinzo Abe, calling Japan’s economic recovery “Abenomics”.  I recently read an article about Japan’s that I found to be particularly interesting.  Before the recession, Japan had been going through massive deflation.  The interest part about this, is that for 15 years, prime ministers, finance officials and lawmakers have told the public that it was the Bank of Japan’s fault for not doing more.  This thinking led Shinzo Abe to hire Haruhiko Kuroda to run the central bank.  It was Kuroda’s decision to implement the very things Abenomics is being praised for.  With Kuroda at the head, the Bank of Japan rose the monetary base to 270 trillion yen. Unfortunately, like many other easing programs in the post recession world, the increase in the monetary base did not lead to the increase in living standards even though the Yen has fallen 20%.  The failure of the increased monetary base illustrates that Japan’s problems can’t be solved by just monetary policy.  Japan’s aging population and China’s raising influence are examples of influences that monetary policy can’t solve.  It is unfair to criticize Japan’s BoJ policies if fiscal policy isn’t being implemented as well.

This past week, the head of the BoJ called on the prime minister of Japan.  The lack of the increase in exports illustrates how the Prime Minister needs to look at lowering corporate tax rates, lowering trade barriers, stimulating innovation and opening the labor markets.  The Bank of Japan is still likely to hit its 2% inflation target and with rates being close to the zero bound, its now the governments time to act.  Kuroda is worried that if the government doesn’t take fiscal action, “the long term interest rates will rise out of line with economic fundamentals”.  This coupled with Japan’s widening trade gap, illustrate increasing problems that the Bank of Japan have very few resources left in its arsenal without fiscal help.  Without the fiscal help, Japan could see a flight of foreign capital that could remove the 57% increase of the Nikkei that Japan witnessed this past year.  Until the Bank of Japan has the ability to use negative interest rates, I believe that the government needs to step in to increase domestic production since the low interest rates have not helped as much as necessary.

The Current Challenges for Japan’s Economy

The growth numbers of Japan seemed a little lower than the expectation of economists. The economy’s growth rate was at an annualized pace of 1% in the fourth quarter, which did not achieve the expected goal of 2.8%. The reasons behind this sluggish performance are the problems of export and domestic consumption.

Japan’s economy has been relying on export as its dynamic engine for a long time. Last year, Prime Minister Shinazo Abe has taken measures to weaken the value of yen in order to boost the export and stock market. However, although the yen’s value decreased sharply since the start of 2013, his policies didn’t have a clear effect on export last year. The export in fourth quarter was only 0.4% higher compared with the previous quarter according to Wall Street Journal. One possible reason to this problem is that more companies are producing products outside Japan so that the value of them will not be counted in the export. For example, Nissan Motor opened its new factory in Mexico last November in order to lower the cost of labor and raw materials and Honda Motor are planning to produce a new type of cars instead of exporting them from Japan. Since many factories start to produce and sell their product in other countries, the fall of yen could not actually help the export growth.

The weak confidence in consumers becomes another factor that hinders the economy growth. The Household spending rose 0.5% in the fourth quarter which was lower than the expected 0.7% rise. It is obvious that consumers are still worry about the Japan’s economy and therefore become more cautious about spending. The rise in winter bonuses at many companies did not release the concerns about future and many consumers decided to save instead of spending them. Although some people were benefit from the recovery in stock market, it still did have an obvious effect because only 8.5% of Japanese households’ assets are in stock. Moreover, the increase in sales tax from 5% to 8% could be a factor that discourages consumption. Since the cost of goods would be higher, we might expect a further decrease in the consumption in the long term. In fact, the sales tax not only effect consumers but also place more burden on companies. Some companies have already declared their plans on cutting down the production due to increasing sales tax.

Therefore, we can see that Japan’s economy is facing the challenges from both export and domestic consumption. The consumers might not gain confidence about the economy unless the government could take effective measures to increase the performance of export.

Japans Down but Not Out!

Despite the Asian market showing promising comebacks, Japan’s Q4 report fell below economist expectations. Disappointing growth figures from Japan’s report showed that GDP only rose 1% as opposed to its anticipated 2.8%. For a country in need of fiscal strengthening and economic growth after years of deflation, this was not the news some hoped for.

Though despite some optimism from economists on Japan’s situation, an increase in the country’s sales tax this coming April from 5% to 8% will further hurt the numbers by contracting spending. So why is Japan increasing their sales tax? They hope that this will cut the nations debt down to size, a priority that the administration put ahead of economic growth. To counteract short run price contraction, Prime Minsiter Shinzo Abe promises more economic stimulus for citizens and businesses. Even with his adminstration’s efforts, economic growth isn’t looking as impressive for a country that has historically been growing very quickly since the 1960s.

 “We need to understand that my administration’s top priority of putting an end to 15 years of deflation is no easy task,” Mr. Abe said earlier on Tuesday. “Furthermore, it’s important to strike a balance between economic recovery and fiscal soundness.” [WSJ]

 “This weak export performance gives us a sense of risk that the Japanese economy may significantly stall after April,” Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, told Bloomberg Television. “Prime Minister Abe really needs to be quick in showing to the market that he can deliver reform.” [Bloomberg]

Japan has low unemployment and is the 3rd largest country in terms of nominal GDP. It’s a leading nation in technological research and has had its economy long driven by exports. Though exports did edge up this past quarter, they were not enough to make up for previous losses. Companies like Nintendo Co., which has not been performing very well with its latest generation console, Wii U. The system has struggled to sell as much as its predecessors hurting exports a bit I presume.

 In 2011, the Tohoku earthquake/tsunami and brought Japan to its knees in trouble. Mass casualties and economic crippling it has been referred to as the toughest, most difficult crisis in Japan since WWII. This was followed by the Fukushima Daiichi nuclear disaster which worried its citizens about their health and safety and is still in the process of reaching full recovery to this day.

I think Japan deserves to make a turn around here. They have faced devastating hurdles such as when the country was hit by tragedy back in 2011. As the largest patent filing, a lot of technological innovation namely with robotics/automobiles/etc come out of Japan. I would look to see Japanese ingenuity and confidence thrive and continue.

Suntory’s Acquisition of Beam: Expensive and (Hopefully) Lucrative

On January 13, Suntory Holdings Ltd. announced it would acquire Beam Inc. for $83.50 per share, which is a 25% premium to the January 10 closing price (the 1/10 stock price is the unaffected price before the news of the acquisition was announced and the stock price jumped). The deal, expected to be completed in June, values Beam at 20.5 times EBITDA (earnings before interest, taxes, depreciation, and amortization). Beam’s enterprise value-to-EBTIDA multiple, which is a common financial metric used in valuations, is expensive when considering that median multiple in the industry in the last five years is 12-14 times EBITDA. In addition, it is the fourth highest valuation in the spirits industry in the last decade. To add a little more perspective, this is the largest beverage deal since Inbev acquired the remaining 50% of Modelo SAB for $17.2 billion in 2012. Although Suntory is certainly paying top dollar for Beam, Suntory expects the acquisition will offer them many lucrative growth opportunities.

Suntory produces Yamazaki whiskey and Premium Malt’s Beer, which are household names in Japan. However, Suntory wants exposure overseas where there is high growth compared with slow growth at home due to an aging population. According to the Wall Street Journal, “Suntory Holdings Ltd. tried to cast aside any lingering doubts that its $13.6 billion acquisition of Beam Inc. is overpriced, saying it will successfully capitalize on the overseas brand recognition of the U.S. whiskey maker as it transforms into a global spirits competitor”. In 2011, 80% of Suntory’s revenue came from Japan. Following its acquisition, 60% of Suntory’s revenue is expected to come from the United States. As a result, Suntory’s acquisition of Beam is positioning the firm to be more diversified away from Japan. I believe this is a good decision because it decreases idiosyncratic risk of having most of its revenues be dependent on the health of the Japanese economy.

Beam is also a rare example of a pure play alcohol company, which means it has a single business focus. Suntory, which approached Beam with an unsolicited offer, is demonstrating “strong enthusiasm for forging ahead with its whiskey business”. For Suntory, the scarcity value of a pure play alcohol company might have provided additional incentive to pay a high price. Furthermore, there has been significant growth in spirits within the beverage industry. Suntory’s acquisition of Beam increases its market share in the United States, the world’s biggest spirits market, from 1% to 11%. In the United States, Beam is the second largest whiskey maker behind Jack Daniels. Similar to Jack Daniels, Beam has a very strong brand. According to the Wall Street Journal, “While Suntory’s whiskey products have been gaining aficionados and accolades in the U.S. and Europe, their brand recognition is still much weaker than Beam’s labels… The company therefore hopes the deal will give it strong ammunition in the form of globally recognized brands to embark on an offensive in overseas markets”. The value of a brand is hard to quantify because it is hard to determine what amount of sales or pricing power come from the strength of the brand. Although critics claim Suntory overpaid for Beam, I believe Suntory will benefit from Beam’s strong brand and its exposure in the United States.

Despite the tremendous potential for growth in this acquisition, Suntory will also be taking some calculated risks due to the financing of the deal. Suntory’s acquisition of Beam is an all cash offer, which means Suntory will issue debt. Suntory will need to issue $12 billion in debt and credit agencies have warned that this massive amount might result in a downgrade of Suntory’s debt. Downgrading of debt is never a good thing as it usually increases borrowing costs for the company (lenders demand a higher interest rate to be compensated for the larger perceived risk). However, Suntory should be able to reduce this debt over time and restore its credit rating. If Beam proves to be as profitable as Suntory hopes, then Suntory may be able to pay off this debt sooner than expected. 

Japan Showing Bad Signs

Recently, Asian markets have improved, but people have been cautious about Japan. The reason for this is that Japan’s growth has been slowing down very quickly. The Wall Street Journal reports that its GDP grew about 1% in 2013. This was below the expected 2.8% growth. This can also be seen with the weakening of the Yen compared to the US Dollar. The New York Times explores other factors. One of these larger factors was the .5% increase in private consumption. The Times connects this to the proactive spending of an increase in sales tax, which is expected to be imposed in April. The Washington Post, also attributes the slowed growth with the tax hike.

On the bright side, Japan’s currency weakened. This sounds bad, but it implies that each Yen is now cheaper. This means that Japanese assets are also less expensive. People will be more interested in purchasing these assets. When the demand for these Japanese rises, their prices go up, along with the value of the currency. Once this happens, the people, who have assets that are mostly in Yen, will see increases in the value of their assets. From what we can see here, this period of growth can be cyclical. Time will tell and we cannot be certain how much foreigners will be interested in a depreciating Yen. If not, then output could continue to decrease in Japan.

The big picture here is that increased sales taxes seem to hurt growth. What a surprise? Not actually because this can be explained with simple economics models. Using a basic supply and demand graph, we shift the supply curve in when there is a tax increase. The easiest effects to see are that the price level increases and the quantity consumed decreases. The quantity consumed can directly affect output since consumption is a component of GDP. The less obvious effects from the model are the decrease in both consumer and producer surplus. Decreases in surplus are other contributing factors to negative growth. Less surplus for consumers means that they will not have as much disposable income to spend on goods and services. This can hurt output even further. On the producer side, they will profit less with decreases in surplus. When firms see continuous decreases in their profits, they come closer and closer to going out of business. If firms continue to profit less, then the industries suffer, which also hurts output. We can see that increased sales taxes can create chain reactions that lead to decreases in output.