 While Japan’s economic performance has been sluggish in the past months, the situation seems to have bottomed out. This will be the case as long as the situation in other developed economies continues improving — particularly in the US and the Euro-zone, its most important trading partners beside China — and domestic demand rises again due to ongoing reconstruction efforts after last year’s triple disaster. Also, the fiscal stimulus that was enacted in 2011 is providing support for local demand. Private machinery orders have seen a strong uptick in November when they grew by 11.7%, a strong reversal after a 6.8% y-o-y decline in October. On a monthly base, this was the highest increase since January 2011 at 14.7%, fuelling hopes that output numbers for the months to come will support the recovery trend. While it was mainly domestic orders, which increased 14.1% y-o-y, that supported this number, foreign orders were also much stronger with an 8.2% increase, compared to a decline of 15.6% y-o-y in October and 14.8% in November. This also supports the observation that Japan’s main trading partners — China and the US — seem to be reversing the trend of a slow-down, which had been observed during the last months of 2011. The support from the order side had already impacted December’s output numbers.
Although industrial production in December was still negative on a yearly base at –2.7% y-o y, the monthly improvement was significant with an expansion of 4.0% compared to November which saw a decline of 2.7% m-o-m. Exports declined again in December, causing the first calendar year trade deficit for Japan since 1980. The triple disaster during the first half of the year, as well as a strong yen, a weakening global economy and supply disruptions caused by floods in Thailand all took their toll. It should thus not come as a surprise that Japan saw a need to import more energy-related goods to compensate for their shortfall in nuclear energy production. Since March of 2011, exports have declined every month on a yearly base, with the exception of September. When analysing the monthly trend, however, one can observe that the situation has improved slightly in December at 0.2% m-o-m growth. But this comes after a decline of 2.4% m-o-m in November and 4.0% m-o-m in October. The seasonally adjusted trade deficit, however, has risen to ¥568 bn in December, the highest level since ¥595 bn seen in January 2009.
This trend of a rising deficit is of importance, given the fact that Japan has long relied on its trade surpluses to support growth and finance budget deficits (which now run at around 200%). A continuation of this trend could therefore have an important impact. There are signs of improvements, but this development has to be carefully monitored. Foreign orders do show a positive trend and Japan ended 2011 with a trade surplus with the US. US-bound exports have increased by 10.9% m-o-m, a second consecutive monthly rise. Exports to Asia rose in December by 0.8% m-o-m, the first increase since August. The recent improvements in US economic indicators might also have a positive effect on Japanese exports to the US, China and other Asian economies, which are a supply base for many products for developed economies.
Furthermore, demand from Thailand for capital goods for the restoration of damaged supply chains might have a positive impact, too. Foreign orders, therefore, have to be monitored closely in the near future to provide further evidence of a potential rebound in foreign trade. Improvements on the domestic side of the economy are also encouraging. Retail trade has risen in December by 2.5% y-o-y, after a decline of 2.2% in November. This increase translates into a monthly rise of 19.2%. According to household surveys provided by Japan’s statistical office, real expenditures in December grew by 0.5% y-o-y, after a decline of 3.2% y o-y in November. This is also an encouraging sign that domestic demand is recovering. This rising demand also supports the consumer pricing side, which slowly seems to have moved towards positive territory.
In December the Consumer Price Index (CPI) declined by 0.2% y-o-y, lower than in November when it fell by 0.5%, a positive momentum towards a healthier level of inflation. At the same time, it should be highlighted that the main drivers for price increases have been food and energy. Taking out these two volatile areas, however, shows that prices have declined by 1.1% y-o-y in December, reaching the same level — i.e., with no improvement as in November. The slightly positive trend in exports and domestic demand alike has had a correspondingly positive effect on the Purchasing Managers Index (PMI) as well. The PMI for manufacturing in January moved to 50.7 from 50.2, according to Markit. More importantly, when it comes to GDP contribution, the services sector PMI even increased to 51.0 in January, after reaching 50.4 in December, with both moving the composite PMI up to 51.1 after 50.1 in December.
Furthermore, it should be expected that the fiscal and monetary stimulus measures, which were announced in 2011, should also provide support for growth in 2012. At the end of the previous year, the government announced a stimulus package — the 3rd supplementary budget of 2011 — which had been proposed by the government in October 2011 and was enacted by the Japanese legislature, the Diet, at the end of November. This package is considerable: ¥12 trillion ($150 bn), which brings the total fiscal stimulus, which was announced after 2Q11 to address the negative effects of the triple disaster, to a total amount of ¥16.1 trillion. This is certainly considered to be supportive for the economy and is expected to help GDP growth in 2012 by around 2.5% to 3.0%. So taking the most recent development together, it should be concluded that while some areas are still in decline on a year-by-year basis, particularly exports and industrial activity, there are signs of bottoming out. Manufacturing output seems to be supported by improving domestic demand. Taking the continuing deceleration into consideration, while also acknowledging an improvement in the underlying economy, the GDP forecast for 2011 has been adjusted to –0.8% from –0.7%, while 2012 has been slightly revised to 1.8% from 1.9%.
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