Depression in Japan
The statistics coming out of Japan have been truly awful of late. In my last post, you saw a small video connecting reduced spending in the U.S. to Japan. However, I need to be more explicit about how things are unraveling in Japan. The industrial production number that was released this past Friday was a wake-up call that Depression has arrived, at least in Japan. Industrial production fell a stunning 9.6%, the most since statistics began in 1953. This is a figure that translates into a GDP of 10% — and this in the world’s second largest economy.
Frank Veneroso’s latest piece “The Yen is madness” sums it up quite well (hat tip Scott):
December industrial production came in down 9.6%, worse than the METI forecast. It is now down almost 21% year over year. METI forecasts a further 4.7% decline in February. The inventory to production ratio soared again. Maybe METI will be correct. If it is Japan industrial production will have fallen 28% (non annualized) in four months. It will have fallen by a third in about a year. Nothing in the history of major nations compares. A 28% decline in four months would be more than half of the entire decline in U.S. industrial production over the 3 years and nine months of the U.S. Great Depression. It would be a greater decline in four months than in any 12 month period in the Great Depression in the U.S. We are literally looking at the unimaginable.
This is a wake-up call to everyone, especially China bulls because everywhere in Asia, a similar story can be told. The Economist puts this into context.
It seems so unfair. Most Asian economies have been models of prudence. While American and European households were borrowing up to the hilt, Asian ones were tucking away their savings. While rich-country banks were piling into ever-riskier assets, Asian banks kept their holdings of such assets small. And while America and Britain were sucking up the world’s savings, Asian governments piled up vast stocks of foreign reserves.
Yet many of Asia’s tiger economies seem to have been hit harder than their spendthrift Western counterparts. In the fourth quarter of 2008, GDP probably fell by an average annualised rate of around 15% in Hong Kong, Singapore, South Korea and Taiwan; their exports slumped more than 50% at an annualised rate. Share prices in emerging Asia have plunged by almost as much as during the Asian financial crisis a decade ago. That crisis was caused by Asia’s excessive dependence on foreign capital. This time the tigers have been tripped up by their excessive dependence on exports.
Asia’s emerging economies have long been the world’s most dynamic, with GDP growing at an annual rate of 7.5% over the past decade, two and a half times as fast as the rest of the world. Only last summer, many of these countries were being warned by foreigners that they were growing too fast and needed to raise interest rates to prevent a surge in inflation. Now, many seem to be in free fall and the news is likely to get grimmer.
In the fourth quarter of 2008, real GDP fell by an annualised rate of 21% in South Korea and 17% in Singapore, leaving output in both countries 3-4% lower than a year earlier. Singapore’s government has admitted the economy may contract by as much as 5% this year, its deepest recession since independence in 1965. In comparison, China’s growth of 6.8% in the year to the fourth quarter sounds robust, but seasonally adjusted estimates suggest output stagnated during the last three months.
Asia’s richer giant, Japan, has yet to report its GDP figures, but exports fell by 35% in the 12 months to December. In the same period, Taiwan’s dropped by 42% and industrial production was down by a stunning 32%, worse than the biggest annual fall in America during the Depression.
Asia’s export-driven economies had benefited more than any other region from America’s consumer boom, so its manufacturers were bound to be hit hard by the sudden downward lurch. Asian exports are volatile anyway (see chart 1). And though the 13% fall in the region’s exports in the 12 months to December was slightly smaller than in 1998 or 2001, those dismal records seem certain to be beaten soon.
The plunge in exports has been exacerbated by the global credit crunch, which made it harder to get trade finance. Destocking on a huge scale has further slashed output. Trade within Asia has dropped by even more than the region’s sales to America or Europe. Exports to China from the rest of Asia were 27% lower in December than a year earlier, partly reflecting weaker demand for components for assembly into goods for re-export.
Shocking as the export figures are, they are not entirely to blame for Asia’s woes. A closer look at the numbers reveals that in most countries imports have fallen by even more than exports, and that weaker domestic demand explains a larger part of the slump.
In China, for example, weaker domestic spending—mainly the result of a collapse in housing construction—accounted for more than half of the country’s slowdown in 2008. In South Korea, net exports actually made a positive contribution to GDP growth in the fourth quarter, while consumer spending and fixed investment fell at annualised rates of 18% and 31% respectively. South Korea is an exception to the rule of Asian prudence. Its households’ debt amounts to 150% of disposable income, even higher than in America. The banking system, which borrowed heavily abroad to finance a surge in domestic lending has also been badly hit by the global credit crunch, making it harder for firms to finance investment.
Domestic spending has collapsed elsewhere. Over the past 12 months, retail sales have fallen by 11% in Taiwan, 6% in Singapore and 3% in Hong Kong. As big financial centres, the two city-states have been battered by the global storm. Both have high levels of share ownership, so tumbling stockmarkets and property prices are depressing consumption. In Hong Kong average house prices have already fallen by almost 20% since the summer and Goldman Sachs, an investment bank, forecasts another 30% drop by the middle of 2010.
Do I need to go on here? All of Asia is in a recession more severe than the Asian Crisis in 1997-98.
So, what does all of this mean?
First and foremost, one should look at Japan. Here’s a country that has gone through massive monetary and fiscal stimulus for a decade, ballooning their government debt level to 200% of GDP. And, yet, they are seeing a collapse worse than the Great Depression. Japan has a massive domestic savings to absorb government debt. However, one cannot just continue printing money without consequence.
Question: will stimulus save us or is Japan just a bad example? The conventional wisdom is that Japan waited too long to provide stimulus and they also propped up their financial sector in ways that the West will not. Carl Weinberg of High Frequency Economics certainly takes that line in the video I from the last post. But is that really true? I see Japan as a worrying example of how ineffective stimulus can be. As I have said before, stimulus is no panacea. We are still going to suffer greatly nevertheless. Fixing the banking system and liquidating overcapacity are more important even than stimulus.
Then comes the question of what Asia’s collapse portends for North America and Europe. After all, exports from Asia are collapsing largely because demand in North America and Europe is collapsing. The Economist demonstrates in their article that Asia was too dependent on exports as a model for growth. However, I can’t help but think the interconnectedness of the global financial system will bring all of this back to the West in terms of reduced appetite for financial assets as Asians reduce their exposure.
My own view is that the West too often views Japan as a separate case and fails to appreciate the parallels there with what is occurring in the West — the asset bubble, the aging population, the monetary stimulus, the fiscal stimulus, the broken banking system. Japan is in Depression. However, Japan is not that different. What is happening there could just as easily happen here.
Record 9.6% fall in output sparks fear for Japan’s future – Times Online
Troubled tigers – Economist