Outlook for the Japanese economy

Transcription

1 Outlook for the Japanese economy Presentation to a luncheon for the Queensland-Japan Chamber of Commerce and Industry Saul Eslake Chief Economist ANZ Bank Brisbane Hilton 3 rd February 7

2 World economy in what is likely to be its longest period of above-trend growth in over 3 years Global economic growth Real % change from year earlier World Advanced economies Developing economies Note: GDP is measured in US$ at purchasing power parities. Source: IMF; Economics@ANZ.

3 Above-trend global growth is largely being driven by developing countries Advanced economies Developing economies 7 % 65 % 65 6 Share of global GDP 6 55 Share of global growth (5-yr moving average) Share of global growth (5-yr moving average) 4 35 Share of global GDP Advanced economies comprise the US, Western Europe, Japan, Canada, Australia, New Zealand, Korea, Taiwan, Hong Kong, Singapore and Israel. Sources: IMF, World Economic Outlook; Economics@ANZ.

4 Developing economies have provided a source of discipline on advanced economy prices and costs Wholesale prices of goods in the United States Oil prices and inflation % change from year earlier Non-petroleum imports (all countries) US$ per barrel (6 prices) Real oil prices % change from year earlier Non-food & energy goods produced in US Goods imported from China G7 consumer prices (right scale) Sources: US Bureau of Economic Analysis; US Bureau of Labor Statistics; OECD; Datastream; Economics@ANZ.

5 Developing countries have exported massive amounts of capital to the industrialized world Capital flows to developing economies 4 US$ bn Change in reserves Official capital flows (incl government borrowings Private capital flows (incl bank loans) Private portfolio investment Direct investment T otal (incl errors & omissions) Note: Developing economies in this chart includes Korea, Taiwan, Hong Kong, Singapore and Israel. All figures are net. Source: IMF; Economics@ANZ.

6 China s s economy is showing some signs of slowing from last year s s frenetic pace Real GDP Retail sales % ch. from year earlier % ch. from year earlier Actual 6-mth moving average Industrial production Fixed asset investment % ch. from year earlier Actual 6-mth moving average Cumulative % ch. from year earlier Source: China National Statistics Bureau

7 in response to the most recent tightening of PBoC monetary policy Interest rates Bank lending 6.5 % change from year earlier 3 % change from year earlier yr base lending rate Money supply growth Yuan vs US$ % change from year earlier M Yuan per US$ (inverted scale) Source: People s Bank of China.

8 India s s economy has also been doing well but India s speed limit is lower than China s Real GDP - China Inflation % ch. from year earlier % ch. from year earlier India China Real GDP - India Trade balance % ch. from year earlier US$bn (1-mth moving total) China India Source: China National Statistics Bureau; India Department of Statistics; IMF.

9 Some comparisons between China and India China India Saving as a % of GDP (a) Investment as a % of GDP (a) Manufacturing as a % of GDP (a) Adult literacy rate (%) (b) women (b) Life expectancy at birth (b) Infant mortality per 1 live births (b) Tax revenue as a % of GDP (a) Budget deficit as a % of GDP (a) Weighted mean tariffs (%) (b) 6 8 Exports as a % of GDP (a) FDI as % of GDP (a) Corruption ranking (c) 71 9 Days to establish a new business (b) (a) Average for ten years ended 4. (b). (c) 4. Sources: Economist Intelligence Unit; UNDP Human Development Report; World Bank World Development Report and Doing Business; Transparency International Corruption Perceptions Index.

10 By some counts Japan is now enjoying its longest economic expansion since the 196s Japanese real GDP growth 1 % change From previous quarter (annualized) From year earlier Note: Shaded periods denote recessions (as designated by ESRI). Source: Economic & Social Research Institute, Cabinet Office.

11 but growth has been very weak by comparison with earlier boom periods Real GDP growth in three cycles Recession trough = 1 Izanagi boom (Q ) Heisei boom (Q ) Current expansion (Q1 - ) Source: Economic & Social Research Institute, Economics@ANZ.

12 A striking contrast between profit and jobs growth in the current and previous expansions Real corporate profits Employment 4 Recession trough = 1 11 Recession trough = 1 Izanagi boom (Q ) 11 Heisei boom (Q ) Current expansion (Q1 - ) Heisei boom (Q ) Izanagi boom (Q ) Current expansion (Q1 - ) Note: real profits are operating profits deflated by the GDP deflator. Sources: Economic & Social Research Institute; Home Ministry; Economics@ANZ.

13 Household and consumer spending have been particularly weak compared with previous cycles Exports Consumer spending Recession trough = 1 Izanagi boom Current Heisei boom Recession trough = 1 Izanagi boom Heisei boom Current Business investment Public spending Recession trough = 1 Izanagi boom Heisei boom Current Recession trough = 1 Izanagi boom Heisei boom Current Sources: Economic & Social Research Institute; Economics@ANZ.

14 Japan s s corporate sector has worked off the four excesses created by the 198s bubble 14 Excess capacity 5 Net balance (%) reporting 'excessive' Large Small Excess labour 4 Net balance (%) reporting 'excessive' 3 Large 1-1 Small Source: Bank of Japan Tankan survey Excess inventories 4 Net balance (%) reporting 'excessive' Large Small Excess debt Net balance (%) reporting financial position as 'satisfactory' Large Small

15 and is now in a very strong financial position Profit margins 4.5 % (4-qtr moving average) Rate of return on assets % (4-qtr moving average) Corporate profit share of GDP 3. % (4-qtr moving average) Debt-equity ratio 5 % (4-qtr moving average) Sources: Bank of Japan; Tokyo Shoko Research Company.

16 Most businesses are reasonably optimistic about the business outlook 5 Tankan business conditions - all enterprises Net balance judging "good" (%) Large firms 5 Tankan business conditions - non-manufacturers Net balance judging "good" (%) Large firms -5 Small firms -5 Small firms Tankan business conditions - manufacturers Net balance judging "good" (%) Large firms Small firms Shokochukin business conditions - SMEs Net balance (%) Sources: Bank of Japan; Shokochukin Bank

17 Consumers are becoming more confident but are still worried about the lack of income growth Consumer confidence Employment prospects Net balance judging "good" (%) Tokyo All Japan Net balance judging "good" (%) Overall livelihood Income growth Net balance judging "good" (%) Net balance judging "good" (%) Source: ESRI.

18 and they re right: employment has been rising but income growth is still very flat Employment Unemployment rate % change from year earlier Trend Actual % Trend Actual Job offers ratio Employee cash earnings Ratio of job offers to job applicants 4 's Trend Actual Sources: Ministry of Health, Labour and Welfare.

19 Not surprisingly, therefore, consumer spending has remained fairly soft Retail sales volume % change from year earlier Trend Actual Real consumer spending % change from year earlier Household saving rate Real consumer spending % (1-mth moving average) % change from previous quarter Note: saving rate is for workers households. Sources: ESRI; OECD.

20 Deflation is officially over but deflationary pressures haven t t been totally eliminated Corporate (wholesale) prices % change from year earlier Services Domestically produced goods Consumer prices % change from year earlier Excl. 'perishables' 'Headline' Sources: Bank of Japan; Prime Minister s Office; ESRI GDP price deflator % change from year earlier Tankan output prices judgement Net balance (%) reporting increases Large firms Small firms

21 BoJ will continue to normalize rates but only very slowly Current accounts at the BoJ Japanese interest rates bn daily average End of 'quantitative easing' % pa Overnight call rate Bank lending % change from year earlier Sources: Bank of Japan; Economics@ANZ.

22 Persistently low interest rates are encouraging massive capital flows out of Japan Capital flows from Japan US$ bn Change in reserves Other capital flows Private portfolio investment Direct investment Japan-US 3-mth Libor spread 8 Basis points Real trade-weighted yen = Sources: Bank of Japan; JP Morgan.

23 Japan faces a considerable task in cleaning up its public finances Government financial balance Government debt % of GDP % of GDP 18 Gross Net Actual Structural Source: IMF, World Economic Outlook, December 7.

24 Falling population, participation and productivity growth are key challenges for Japan Population growth.8 % change from year earlier Labour productivity growth 1 % pa (5-year moving average) 8 6 Japan 4 US Labour force participation % of civilian population aged Sources: ESRI; Home Ministry; University of Groningen and The Conference Board, GGDC Total Economy Database 7. Productivity as a pc of US level % Australia Japan

25 A surprisingly large proportion of Japan s s work force is employed in low-productivity industries Productivity in 11 sectors of the Japanese economy relative to the US % of US productivity level Steel Automotive parts Metalworking Cars Consumer electronics Computers Soap and detergent Beer Food processing 4 Retail Housing construction % of total employment Source: William W Lewis, The Power of Productivity, University of Chicago Press (4), p. 5 (based on studies by McKinsey Global Institute).

26 Summary of the economic outlook for Japan World real GDP growth (%) ½ 4½ US real GDP growth (%) ½ 3 China real GDP growth (%) ½ 9 Other E Asia real GDP growth (%) ½ 5¾ Japan real GDP growth (%) ¾ Employment growth (%).4.4 ¼ ¼ Unemployment rate (%) (a) CPI inflation (%) (b) ½ 1 Call money rate (% pa) (a) Yen-US$ (a) Yen- (a) Yen-A$ (a) (a) December (b) Year to December quarter; all other forecasts are year-average