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Articles:

Economy Shrinks Annualized 2.4% On Weak Domestic Demand

(Nikkei) Declining consumer and capital spending contributed to pushing down Japan’s gross domestic product 0.6% in real terms from the previous quarter during the April-June period, for an annualized rate of minus 2.4%, according to preliminary data released Wednesday by the Cabinet Office.

The first contraction in four quarters was also attributed to a drop-off in exports amid the U.S. economic slowdown.

Domestic demand contracted 0.6%, with personal spending shrinking 0.5% as price hikes for a number of daily necessities dampened consumer sentiment. The weaker demand also reflected the fact that the previous quarter had one more day than in normal years because 2008 is a leap year.

Capital spending declined 0.2%, while housing investment slid 3.4%. Overall domestic demand pushed down GDP growth by 0.6 percentage point.

Exports, which had until recently driven economic growth, fell 2.3%, meaning overseas demand failed to push up GDP growth in the three months ended June.

In nominal terms, GDP contracted 0.7% for an annualized rate of minus 2.7%.

Fails to mention it grew at over 3% in the prior quarter, so the two quarter average is marginally positive. Japan data seems to have more noise than US data.

Also note the nominal measure over the last year:

Nominal GDP Q/Q:

 
 
Lots of noise due to ‘inflation’ as they measure it.

Yes, a soft quarterly report, but as expected or slightly better than expected on most counts.

Same twin themes as the US: weakness and higher prices.

And lots of talk about a fiscal program over there.

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from Dave:

Japan core CPI last night came out at 1.9% as expected

Petrol products were up +23.9% y/y

Non fresh food products were up +3.5% y/y

Core-Core CPI (ex energy and ex fresh food) rose +0.1% vs -0.1% in the previous month indicating some signs of higher energy and food prices filtering through the economy to other products and services

Price pressures continue to grow at the corporate level (see graph of Corporate Services Price Index CSPI and Corporate Goods Price Index CGPI)

Expectations from many dealers and BOJ’s Mizuno is that CPI could reach as high as 2.5% by the fall

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(an email exchange)

>
>   On Mon, Apr 21, 2008 at 9:55 AM, Russell wrote:
>
>   Fannie and Freddie now back 82% of all mortgages in the U.S.,
>   up from only 46% in the second quarter of 2007. If they need
>   a bailout – could be a trillion dollars –

Funds are already advanced to the homeowners which supports demand.

A ‘bailout’ would only be an accounting entry between the government’s account and the agency’s account - no effect on aggregate demand.

>   the USA may lose its AAA credit rating.

Like Japan did. Just another sign of incompetance by the ratings agency if it happens.

Seems no end to the stupidity that continues to spew out from all kinds of places.

You’d think the ratings agencies would have learned their lesson with Japan - downgraded below Botswana and still funded JGB’s at under 1% for years until the BOJ raised rates.

And last I saw ten year US credit default was around ten basis points?

I had a discussion with S&P years ago. Seem to remember a name ‘David’?

He seemed to sort of grasp that operationally governments with their own (non convertible) currencies and floating fx policies aren’t revenue constrained, but obviously didn’t quite get it when they downgraded Japan.

The eurozone is another issue, where they have downgraded national governments and that does mean something regarding risk, just like the US States, but with no legal safety net by the Federal authorities like the US. Fortunately the eurozone banking system hasn’t been tested, yet.

Simple trade: sell US credit default, buy Germany, for example.

US credit rating under threat

by Aline van Duyn

The US government’s need to provide financial backing to the state-sponsored mortgage financiers that dominate the US housing market could pose a risk to the country’s triple-A credit rating, Standard & Poor’s, the credit rating agency, said on Monday.

In the event of a deep and prolonged US recession, S&P said the potential costs of propping up government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, which have implicit government backing, could cost the US government up to 10 per cent of GDP.

The costs of supporting broker-dealers like Bear Stearns in a dire economic situation would be much lower, at below 3 per cent of GDP, S&P said.

“The size of GSEs, coupled with their current level of common equity, could create a material fiscal burden to the government that would lead to downward pressure on its rating,” the S&P report said.

The S&P comments come amid increased pressure for better regulation of the mortgage financiers, especially as their role in the US housing market is likely to increase as they are used to provide support for struggling homeowners.

Policymakers are pushing for Fannie Mae, Freddie Mac and the lesser-known Federal Home Loan Banks to pump liquidity into the US mortgage market and this has prompted regulators to call for stronger oversight of such institutions.

Fannie Mae, Freddie Mac and the Federal Home Loan Banks have become the backbone of the troubled US mortgage market as purely private sources of finance have all but dried up or are offered only at punitive terms.

In the second half of 2007, about 90 per cent of new mortgage funding was provided by GSEs. They have about $6,300bn of public debt and mortgage securities outstanding, more than the $5,100bn of outstanding US government debt.

Fannie Mae and Freddie Mac have no formal state guarantees but investors believe the US government would step in if the system got into trouble. This allows the agencies to raise funds at very low rates against a triple-A credit rating, in spite of high levels of leverage.

The capital surplus ratio for GSEs was recently reduced to 20 per cent from 30 per cent, allowing them to operate on a more leveraged basis.

In January, Moody’s Investors Service, another credit rating agency, said the US could risk its triple-A rating within a decade unless soaring healthcare costs and social security spending was curbed.

US can learn from Japan’s crisis

by Michiyo Nakamoto

(Financial Times) The US should inject public funds into its financial system, which is undergoing a worse crisis than that experienced by Japan during its non-performing loan crisis, according to Japan’s financial services minister.

“It is essential [for the US] to understand that given Japan’s lesson, public fund injection [into the financial sector] is unavoidable,” Yoshimi Watanabe told the Financial Times..

The blind leading the blind.

What turned Japan was 7%+ deficits particularly when you include fx purchases.

Same with the US in 2003.

It’s always fiscal that supports aggregate demand as a point of logic.

The MOF would have bought USD long ago if Paulson hadn’t gone around branding any CB a ‘currency manipulator’ and an international outlaw.

The USD is in freefall and is now the major source of inflation.

And maybe the Fed as seen the connection?

MOF Frets Over Yen, But No Hint Of Intervention

by Takeshi Takeuchi

(Dow Jones) Japanese currency authorities expressed alarm about the dollar’s fall close to the Y100-mark for the first time since 1995 but didn’t offer any clues about whether or when they might take any countermeasures.

Finance Minister Fukushiro Nukaga and his vice minister on currency affairs, Naoyuki Shinohara, separately voiced caution after the dollar fell to Y100.19 in the mid-day Tokyo session.

Nukaga said it is “a shared perception among the G7 (Group of Seven industrialized countries) that excessive exchange rate moves are undesirable,” while Shinohara also noted “excessive foreign exchange moves are undesirable.”

The two point men for Japan’s currency policy also said they will “continue closely watching foreign exchange markets,” a code phrase that shows their displeasure about current dollar/yen moves.

Neither of them, however, commented on whether they are considering taking countermeasures against the dollar’s rapid fall against the yen.

But Shinohara repeated the word “excessive” a few times in exchanges with reporters, suggesting the ministry’s level of caution has been at least raised in response to the imminent possibility of the dollar’s break below the Y100-mark.

In the past, finance ministry officials usually stepped up their currency rhetoric in stages before intervening. Their remarks on yen strength often changed from “rapid” to “a bit sharp” to “brutal,” while they also threatened “appropriate action” as an advance warning before intervening.

(an interoffice email)

Hi Dave,

If core inflation is finally showing up in Japan that says a lot for world inflation in general!

warren

On Dec 28, 2007 8:12 AM, Dave Vealey wrote:
>
>
>
> With last nights stronger then expected release of core inflation in Japan
> (+0.4% y/y vs. +0.3% expected), January will see linkers pickup another 0.10
> in their index ratio. Prior to last nights release the index ratio was
> expected to be unchanged for the month of Jan.
>
>
>
> DV
>
>