Japan's recovery ... finally a balanced account

The real news here happended a couple of weeks ago as the Japanese Central Bank (the BOJ) chose to raise interest from 0 to 0.25% on the back of a 'recovery' which I have played down on several occasions as I just did not share the wild optimism displayed by most pundits. An optimism which is essentially vested in short termism ... like for example this Economist article posted a couple of weeks ago.

'Like a tide pushing inland, Japan's recovery is now touching the economy's remotest parts. What began as a pick-up in exports in 2003 was by the end of last year a recovery clearly rooted in domestic demand. Companies have recently been making record profits, and have rejoiced in full order books. As the gap has narrowed between what the economy actually produces and what it is capable of, demand for workers has increased. Last November inflation, measured by core consumer prices (which exclude fresh food, but include energy), rose for the first time in years. It has been in positive territory ever since. This is the end, then, of Japan's long era of deflation.'

I am not attacking the analysis per se, just its biased argumentation. For example; why is it that the recovery clearly is driven by domestic demand, is it in fact not also driven a lot on exports? Could the tightening labour market be caused by a fundamental compositional change in the Japanes demographic landscape? In the end is the case for a BOJ raise really that strong once we allow ourselves to stop and look for just a little bit. This is basically it ... my continous rant about Japan has merely been a call for a more balanced asessment of the data and causality and consequently caution. Now I must say that with the recent OECD economic survey of Japan published Tuesday and the subsequent round-up of my favourite newspapers and magazines I feel as if my call somehow have been heard and I for example applaud the balanced analysis made by the recent addition of The Economist; see leader and article.

Let me first and foremost point to this ...

Yet the job is only half-finished. There is a series of urgent tasks for the country. Monetary policy is at the top of the list. Last time the central bank raised rates, in 2000, a disastrous recession ensued. This time the increase is justified, because the economy is fundamentally stronger; but the bank's inflation range of 0-2% is too wide for comfort in a country still shaking off deflation. It needs to be closer to 2%.

And there is much else to do. At more than 170% of GDP (less on a net basis) government debt is too high. Banks are still banned from dealing in securities, which makes them weaker than they otherwise would be. Foreigners are waiting for Japan to open the market for corporate control by honouring its promise that they will, in effect, be able to issue shares to finance a takeover. There is little competition, and therefore low productivity, in the service sector.'

[And from the FT on the OECD survey] 

'The Bank of Japan should not rush to raise interest rates further while the government tries to rein in budget deficits and the economy still faces the risk of slipping back into deflation, the Organisation of Economic Cooperation and Development warned on Thursday.

The warning followed the BoJ’s move last Friday to raise interest rates above zero for the first time in six years.

(...)

It [The OECD] said the central bank should wait for the growth rate in the core consumer index, the main indicator of inflation, to move above 1 per cent before raising interest rates further.'

So am I focusing narrowly on the negative spots here? Not at all, Japan's economy is indeed moving ahead and it truly seems as if deflation is a thing of the past but the real challenge lies ahead for Japan. With the oldest populattion in the world the idea of growht in Japan and how/when we might or might not get back to that illusive trend path requires a new way to look at things and this is all I am really saying here. Japan is surely picking up the pace and that should be applauded but do not take anything for granted here.