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By HaleStewart April 9, 2014 9:10 am
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Japan's Slow Growth Continues

Earlier this week, Japan voted to maintain their current interest rate and asset purchase policy.  Contained within their statement was an assessment of Japan's current economic environment.  In this post, I'll look at the data specifically mentioned in the BOJ's assessment of Japan's economy which highlights the continued slow upward slog of Japanese growth.

Here are the salient points:

Exports have recently leveled off more or less. The pick-up in business fixed investment has become increasingly evident as corporate profits have improved. Public investment has continued to increase. Private consumption and housing investment have remained resilient as a trend with improvement in the employment and income situation, albeit with some fluctuations due to the consumption tax hike. Reflecting these developments in demand both at home and abroad, industrial production has been on a moderate increasing trend. Business sentiment has continued to improve, although some cautiousness about the outlook has been observed.

Let's start by looking at exports:

The above chart plots exports, imports and the overall trade balance.  While Japan used to be considered a net exporter, exports have in fact been relatively stable for the last four years.  This is due to two factors: the offshoring of Japanese production and an overall slow world economic environment.  Imports, on the other hand, have been increasing, leading to a fairly sharp increase in the trade balance.  The low price of the yen is helping to exacerbate this situation by making imports more expensive.

The chart above shows the total amount of domestic shipments of capital goods.  First note the very low current level of these when compared with the levels before the recession.  However, since the first quarter of 2013, there has been a marked improvement in this metric.

The chart above breaks down the investment data between large and small/medium companies, in addition to breaking down the information along manufacturing and non-manufacturing firms.  Again note the large discrepancy between the pre and post recession levels for all firms.  More importantly, the recent uptick has been occurring more in the small/medium businesses.

The above chart shows consumer consumption numbers along with the composition of this metric.  As the BOJ noted, consumers have been spending at a fairly regular pace over the last three years, with only one quarter of contraction (3Q12).  Most importantly, they've been spending on a solid cross section of goods and services as shown by the composition numbers.

Finally we have the housing investment graph, which does show a solid uptrend in place over the last two years.

The above charts indicate the Japanese economy is making progress.  But, like the US economy, Japan is trying to emerge from a very weak economic state that is financially based -- here, a period of incredibly long deflation.  When compared to a recession that is caused by the central bank raising interest rates to slow inflationary pressure, these recoveries are far more difficult to start and maintain.  More importantly, there is only so much the central bank can do with monetary policy.  And frankly, the BOJ is probably pretty close to the practical limits of its power.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer 



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