Opportunities in smallcaps header image 2

Japan in the doldrums

February 25th, 2009 · No Comments

Anyone who thinks that things are not seriously wrong, read this. And we’re talking about the second biggest economy in the world here…

Japan has a trade deficit??! We had to read it twice. This must be some alternate universe, for sure… Nope. It’s real. Another curious thing is that despite that trade deficit, the yen rose (at least until very recently). Which means someone must have been buying Japanese assets, as a trade deficit must be compensated by capital inflows.

This really is curious indeed:

  • A trade deficit by itself means an excess supply of yen (as Japanese buy more goods and services abroad, changing their yen into foreign currencies than foreigners buying Japanese goods and services, and hence yen to pay for them)
  • The excess supply of yen should have made the yen fall. Instead, it rose…
  • Which means, someone is buying yen. That is, buying yen to buy Japanese assets.

We can’t figure out why. Japanese stocks? Not really (the big names are dependent on exports, and the domestic economy is also in the doldrums).. Japanese bonds? Hardly (Japan has the largest outstanding debt as a % of GDP of any rich nation).

Even energy prices are helping (Japan is a massive net importer of oil and gas).

There used to be the carry trade, people borrowing yen because of it’s low interest rate to invest these in higher yielding assets abroad, but this exerted downward pressure on the yen, not upward pressure.

The Bank of Japan certainly has no motive to buy yens, in fact, it has about every motive possible to sell them, as the high yen is part of the story of why Japan is doing so badly.

The only real alternative is Japanese money coming back home. The proverbial wall of Japanese money, a mainstay of international financial markets from the 1980s onwards, has reversed gear. Interesting stuff indeed!

Japan Exports Plummet 45.7%, Deficit Widens to Record (Update2)
By Jason Clenfield

Feb. 25 (Bloomberg) — Japan’s exports plunged 45.7 percent in January from a year earlier, resulting in a record trade deficit, as recessions in the U.S. and Europe smothered demand for the country’s cars and electronics.

The shortfall widened to 952.6 billion yen ($9.9 billion), the biggest since 1980, the earliest year for which there is comparable data, the Finance Ministry said today in Tokyo. The drop in shipments abroad eclipsed a record 35 percent decline set the previous month.

Exports to the U.S. tumbled an unprecedented 52.9 percent from a year earlier, and shipments to Asia and Europe also posted the largest-ever declines as the global recession deepened. The collapse is likely to force Japanese companies to keep firing workers and closing factories, worsening an economy that shrank the most in 34 years last quarter.

The pressure on companies to cut jobs and investment is rising and that will make the recession deep and protracted,” said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo.

Shipments to Europe slid 47.4 percent in January from a year earlier, the Finance Ministry said. Exports to China fell 45.1 percent and those to Asia dropped 46.7 percent.

The yen traded at 96.49 per dollar as of 10:49 a.m. in Tokyo from 96.72 before the report. The currency is near the lowest level against the dollar in three months as the weakening economy reduces its allure as a haven.

Yen Relief

The yen’s 23 percent gain against the dollar in 2008 eroded the value of exporters’ overseas sales, exacerbating losses at companies including Nissan Motor Corp. and Toyota Motor Corp. This year, the currency has weakened 6.3 percent, offering some relief to exporters while indicating investors’ growing pessimism about Japan’s economic outlook.

“People are coming to realize that Japan is in deep trouble,” said Hiroshi Shiraishi, an economist at BNP Paribas Securities Japan Ltd. in Tokyo. “Considering what’s happening on the export side, and the implications that has for the domestic economy, the yen is clearly not a buy.”

Japanese stocks touched a 26-year low yesterday and the government is considering buying shares to support equity prices, the Nikkei newspaper reported today, without saying where it got the information. The Nikkei 225 Stock Average has lost 17 percent of its value this year. It rose 1.5 percent in morning trading.

Shrinking Economy

The world’s second-largest economy shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, and analysts predict the slump will drag into next fiscal year. Japan may shrink a record 4 percent in the year starting April 1, according to economists surveyed. The worst contraction to date was fiscal 1998’s 1.5 percent drop.

Japanese companies cut production an unprecedented 9.8 percent in December from a month earlier and the unemployment rate climbed the most in 41 years to 4.4 percent. Economists predict a report on Feb. 27 will show factory output dropped 10 percent in January.

Nissan said this month it will cut 20,000 jobs and post its first loss in nine years as the global recession cripples car demand. Toyota, which is forecasting its first operating loss in seven decades, will halve production in the current quarter versus the same period last year.

The Bank of Japan last week said it will buy corporate bonds for the first time, widening its asset-purchase program to prevent a shortage of credit from deepening the recession. Governor Masaaki Shirakawa and his colleagues lowered the bank’s overnight lending rate to 0.1 percent in December.

The government has been unable to pass a stimulus package that could help encourage domestic spending in the absence of export demand. Prime Minister Taro Aso is struggling to get approval from the opposition-led upper house to spend 10 trillion yen to aid companies and households, whose sentiment is near a record low.


How is that for optimism:

  • Toyota, until recently on an inexorable march forward, halving production..
  • The government considering buying shares..
  • Life time employment, that mainstay of Japanese corporate life (and it’s intricately linked to the way the whole economy functions), thrown out of the window even by the good and the great, like Nissan..

It sure is ugly out there..

Tags: Credit Crisis · currencies