Research Dept. News
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Monthly Report, num 285 - November 2005
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International review - Japan
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Japan’s economy continues recovery
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Machinery orders in Japan showing favourable trend thanks to domestic demand.
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Japan is continuing to consolidate recovery. At this time, the challenge lies in maintaining the strength of domestic demand, up until now the main factor in growth. Over the past decade, Japan’s growth has been too much biased in favour of the foreign sector which brought about a number of disappointments. Today, the continuation of Japanese growth will have to be based on the strength of domestic consumption.
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Demand indicators are showing moderate growth and, while not presenting spectacular rises, are reporting more and more sustained increases. In this respect, retail sales are holding strong. In August they recovered the drive they had lost in July and confirmed the upward trend that has been dominant in recent months. Car sales dropped in September in year-to-year terms for the third consecutive month although they had increased up to June. Consumer confidence continues to show a more than acceptable rate in terms of the Japanese pessimistic outlook. The slight drop in the third quarter must be seen as being within a process of stabilization at highs for the decade. Even so, levels of confidence are lower than at the beginning of the Nineties when Japan had not yet begun its lost decade.
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Retail sales holding up.
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On the supply side, it is domestic demand on which most optimism is based and this is something new. Domestic machinery orders, an early indicator of investment, grew by 6.6% year-to-year in August and are following a sustained growth profile with a slight upward trend but orders from abroad have been suffering a notable slowdown. Japan will have to pursue growth more concentrated in domestic demand, something which has not been the case until this year. In the past 15 years foreign orders have increased their relative weight to 37.6% of the total.
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As a positive note, corporate bankruptcies in September dropped below 1,000 for the second time this year and, adding weight to this, the Tankan company index improved in the third quarter, although less than expected. Following restructuring programmes carried out, the health of Japanese companies is the best in recent years although the banking sector is still awaiting solution. Industrial production in August continued to represent the weakest side of the present recovery, reporting practically nil year-to-year growth.
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Real-estate sales up in Tokyo.
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The housing market continued its gradual recovery in September with real-estate sales in Tokyo showing the most notable growth at 22.2%, along with maintenance of the upward trend in all indicators. Clearly, the sector is now no longer the block to growth it represented in the Nineties.
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Deflation refuses to disappear.
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On the prices front, the danger of deflation has not yet been put to rest. In August, the consumer price index again dropped by 0.3% year-to-year. The central bank asserts that deflation will have disappeared by year-end but the truth is that prices in Tokyo in September again dropped by 0.6%, which does not mean we can presume that September prices for the whole economy rose and the end of the year is not far off. The unemployment rate was down slightly in August to stand at 4.3% of the labour force. The biggest job creation came in the services sector while the largest job losses showed up in construction.
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Energy prices reduce surplus.
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Japan’s trade surplus continued to shrink in August but the causes of this reduction have changed. Oil has been raising import prices, which grew by 13.5% year-to-year, while export prices have risen by only 0.6%, with the understandable negative effect on the trade surplus. On the positive side, the reduction of exports to China, the main cause of the worse foreign balance this year, is now easing.
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