The Japanese economy is the 3rd largest in the world, with a GDP of $5.458 trillion. The country has a population of 128 million, and a labor force of 65.64 million. GDP per capita comes out to $42,500 which was good for 20th place in the world.
The Japanese economy is made 75.7% of services while industry makes up around 22.8%. The country posts a consistent trade surplus and current account surplus. Japan exports $756 billion worth of goods in 2010, 4th best. It’s imports during that time amounted to $636 billion. Japan’s manufacturing sector is very diversified, with a variety of advanced industries – consumer electronics, automobiles, semiconductors, optical fibers, optical media. The county has a heavy emphasis on exports. A strong Japanese Yen hurts Japanese exporters, and political pressure builds when the Yen appreciates too strongly against its rivals.
BOJ Interest Rate
The Bank of Japan has kept interest rates stuck near zero since the late 1990′s as the economy has battled persistently low prices and negative prices or deflation, for about a decade. The ZIRP (zero interest rate policy) makes the Japanese Yen a leading funding currency for “carry trade”.
That is when an institution or investor borrows money in low interest rate country like Japan, and parks the money abroad in a country with higher interest rates like Australian Dollar, thereby getting a higher yield. The danger is exchange rate risk. During times of “risk appetite” when stocks, commodities, and higher yielding currencies are climbing, more JPY are sold for those currencies, lowering the Yen. However, during times of risk aversion, the opposite occurs as falling stocks cause investors to unwind their carry trade positions by selling higher yielding currencies and buy the Yen so they can pay back the original loan.
Inflation – CPI y/y
Japan’s prices stagnated following the collapse of their housing and financial sectors in the late 80′s. Japan’s central bank had to content with prices that fell into negative territory in the mid 80′s as well as in the mid-90′s, and throughout most of the 2000′s.
Deflation is bad for growth as declining prices can encourage consumers to expect further price falls which makes them delay purchases. The companies, selling less products and with lower profit, have to lower prices further while also laying off staff and further eroding consumer purchasing power and sales. Deflation therefore creates a negative loop.
The Bank of Japan pioneered quantitative easing – printing money in order to buy long-term government bonds – in its battle with deflation, but it has not been able to shed its negative prices. Prices turned positive in 2008, but fell back into negative territory following the recession. At the turn of this year, prices did return back to the 0 level.
Growth – GDP q/q
Faced wit hits battle with deflation, Japan’s GDP was low during parts of the 90′s, turning negative in 1998 and 2001. In the 2000′s Japan grew at growth rates between 0.5% and 3%, but the recession in 2010 was very severe. At its trough in Q1 of 2009, the annual rate was down 10%. Comparing quarter to quarter, as the chart above does, showed growth falling to a -4% q/q rate. Japan economy turned positive the following quarter, but then dipped again into negative territory in the 4th quarter of 2010. The earthquake disaster in March will cut into GDP in the next few quarters before reconstruction boosts growth.
Labor – Unemployment Rate
The Japanese traditionally have a low unemployment rate. It registered below 4% during 2007 and most of 2008, before surging to 5.6% in the aftermath of the recession. Since then it has come down below the 5% level, hitting a 2-year low of 4.6% in March. We’ll see how the labor market will be affected by the events in March. A tighter labor market would put upward pressure on prices, while a looser one would mean wages growth would be lower.
