Japan says inflation is encouraging news for economy

As unintuitive as it may sound, Japanese economists are welcoming runaway inflation as it gives them the chance to foster heightened expectations of a long term jump in prices.

For the rest of the world inflation is bad news but for Japan, a quick rise in food and oil prices is being hailed as an indicator for a turnaround in the economy.

The nation’s headline inflation rate rose to the record level of 1.3 percent in the last fiscal year to March 2008, brought on by significantly increased prices for petrol, pasta and many other fuels and foods. For a country that has been in the grip of pronounced deflation over the past decade, that’s a pretty high level. The majority of central banks in developed nations would balk at anything outside the normal 2-3 percent range that they are comfortable with.

Not that increased prices are fundamentally good for the Japanese economy, they are not. You are going to get a lot less food for your yen now and both public and corporate consumers will have to tighten the belt. Apart from energy and food, inflation has remained at a relative status quo, rising only 0.1 percent in the last year.

This marked increase in headline inflation is, however, an opportunity because of its effect on real interest rates, pushing them steadily downward. If the nominal rate stays at half a percentage point then real rates will be negative, this in theory should spur economic activity in the marketplace and mould sentiment to expect prices to continue to increase.

“We have already seen certain indicators of expected inflation gaining steeply,” says Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management in a phone interview. “Jumps in prices for ice cream, theatre tickets and gasoline are felt straight away by the nation’s consumers. On the other end of the scale there is minimal effect from government bonds.”

Indeed, most Japanese experts will be hoping the inflation is sustained, but that will depend on increased wages and further trends in consumer spending. Wages currently look promising and are entering a positive cycle and will continue to influence matters as long as the Bank of Japan doesn’t meddle with interest rates.

It’s widely expected that the BOJ will not adjust rates, but economists want a guarantee that the current rates will go on in the future, at least until good inflationary expectations are solidified.

China improves trade ties with old foe

The Japanese finance ministry announced by way of press release on Thursday that the nation’s largest trading partner is no longer the United States, but China.

With Chinese trade totalling $220 billion in the year up to the end of March, China has overtaken the US for the first time since the war.

The boost in trade between the old foes seems to be due in large part to the outsourcing of manufacturing from Japan to China to take advantage of the much reduced labour costs.

The United States still runs a very close second, with the trade figure being around $212 billion.

The data represents a record high for the two countries, with Japan’s trade surplus expanding over 70 percent from last year, according to the report.

Increased exports to their neighbours combined with a slightly weaker yen boosted the surplus, which reached 1.652 trillion yen in January.

“Import trade from China is certainly much more attractive with the yen dropping, it makes the goods substantially more affordable,” said Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management. “The results released in the current report have totally eclipsed those previously forecast.”

Koichi Nose, a spokesman for the finance ministry said that the pattern of “expanding trade with our respected neighbours will continue into next year”

Nose added that the figures “show the extent to which many Japanese companies have shifted their work bases over to China.”

Cheap labour costs are not the only reason many Japanese firms want to move production to China, which is catching up Japan as the world’s second largest economy. Another huge bonus of being based in China is that no exportation is necessary in order to take advantage of the massive domestic Chinese demand for goods.

Michael Lane added that there is “a potentially game changing market developing next door, and Japan needs to invest heavily in order to maximize profits.”

Japanese economic upswing continues

Solid company investments have kept driving the recent Japanese economic expansion despite slightly weaker than forecast growth figures coming from a government report released last week.

The current 0.9 percent annualized growth has also been hampered by a significant drop in public expenditure, a knock on effect of recent reforms towards a more minimal government. The main factor, however, has been a decline in one of Japan’s largest trading partner’s economy, with the United States’ dwindling demand for imports chipping away at Japan’s previously booming export business.

Japan has been encouraged by six consecutive quarters of economic expansion with the latest figures showing a 0.3 percent GDP gain on the previous quarter, according to data. An annualized 1 percent gain is forecast if the current trend continues.

One respected Japanese economist, Ryutaro Kono, chief of currency markets at BNP Paribas, believes the current upswing is not sustainable and the next few months will likely see a decline in expansion.

“I don’t think we can keep this extraordinary run going into the next quarter, however strong consumer expenditure and some significant private investment will prevent the economy sliding back into contraction,” he said.

After nearly ten years in the wilderness, Japan’s economy has shown real signs of a recovery in the last few years with a massive 3.3 percent growth figure in 2005.

Surprisingly, it has been domestic spending that has spurred growth in the past few months rather than exports, a factor the Japanese have historically heavily relied on.

Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management attempted to make sense of the data in a blog article on Friday, “The recent reports show us that in the larger scheme of things the recovery is on-going. The main factors supporting growth at this stage seem to be an upsurge in corporate and private spending within Japan. These factors are propping up very disappointing export performance, and offer another dimension to an economy that has previously placed a disproportionate amount of importance on its foreign trade.”

As exports to the United States had waned, due to their own flagging economy, private sector investment has surged within Japan.

Consumer spending held up well amid plummeting public investment figures due to new budget policies at national and regional government levels. It is evident that the average Japanese is unfazed by the new reforms as they continue to spend on holidays, dining and electronic products.

UK Glass firm reaches Nippon agreement

Japanese company Nippon Sheet Glass have reached an agreement to acquire UK glass producer Pilkington in totality.

Nippon already own 20 percent of Pilkington and offered to purchase the remainder for nearly £2 billion.

The deal brings to a close four months of negotiating between Nippon Sheet and the Lancashire-based glass manufacturer who are over 170 years old and employ close to 25,000 staff across the Midlands and North of England.

Nippon originally offered £1.59 per share but this was seen as too cheap by the Pilkington executive board.  They eventually managed to hold out for an improved £1.66 offer.

As the agreement was made public last Friday, Nippon also revealed that they would initiate plans for the issue of convertible stock that could raise a billion dollars’ worth of funds.

Crack the competition

According to interested observers, the agreement will benefit Nippon with huge savings due to the ability of the firm to tie-up its already existing UK subsidiary NGF Europe with the headquarters of Pilkington, both of which are located in the heart of Lancashire.

The acquisition will also provide Nippon with the clout to offer serious competition to the glass manufacturing word leaders, most notably Japan’s Asashi which currently covers about 25 percent of the world market. Pilkington is a major takeover, itself accounting for about 20 percent of the global market. Nippon currently has about 10 percent.

Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management commented on the takeover in a phone interview, “Japanese glass firms have been keeping a very close eye on Pilkington. A few months ago they announced a 23 percent rise in first half profits and have, in general, become more profitable and economical over the last few years.”

Lane added, “The Nippon deal will allow Pilkington to branch out and improve their position in the world market.”

Stronger than expected growth for Japan economy

The pace for Japan’s growth beat experts predictions as it soared at a 5.6 percent annual rate in the last quarter of 2005, latest reports show.

A surge in export trade has led to four consecutive quarters of expansion, and an upturn in domestic spending is an encouraging indicator for a long term recovery.

All this could lead to an interest rate hike by the Bank of Japan if the central bank decides to halt its five year monetary easing policy in response to the nations reversal of fortunes.

Uncertainty about the BOJ’s plan sent the Nikkei-225 down by over 2 percent at the end of last week to 15,713.57, its lowest level for a month. Economists have also observed increased nervousness on the part of American financial institutions towards Japanese shares recently, most notably Morgan Stanley.

GDP gained 1.5 percent in Q4 of 2005 compared with the third quarter, data from the financial branch of the government showed. That surpassed expert’s predictions of 1.2 percent and translates to an annual rate of 5.6 percent, as opposed to the 5 percent predicted.

“When you compare 1 percent growth rate of the U.S. we can clearly see that the Japanese economy is looking very healthy indeed,” said Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management in an email to investors. “The picture is far from perfect, of course, with a few areas including consumption possibly dropping back in Q1, but overall the Japanese economic development is driving full steam ahead.”

Interestingly, it has been solid domestic demand that has superseded foreign trade as the main factor pushing the economy forward and spurring the upswing since last year.

Boosted by rises in wages and positive employment figures, private sector consumption jumped nearly 1 percent in Q4. It’s the first time that overall wages, including bonus and overtime pay, have risen since the turn of the century. Retail figures also increased as the harsh winter forced consumers to spend extra cash on home heating and cold weather clothing.

The steady increase in GDP also suggests an upturn in Japan’s exports to its most influential trading partners like China and the U.S., a factor which has had little influence on GDP in previous quarters.

There was also a 2 percent gain in private-sector capital spending, leading many speculators to bet against an immediate BOJ action to tighten credit. A knock on effect of this has been a 1.5 percent fall in 10-year yield government bonds.