Japan Recovery:

 Article Source:     https://mainichi.jp/english/articles/20220402/p2g/00m/0na/013000c

Article:

TOKYO (Kyodo) -- Japan's recovery from the COVID-19 economic fallout is at a crossroads as surging raw material costs, driven by the war in Ukraine and amplified by a weak yen, are beginning to cool corporate sentiment.

Despite emerging evidence of companies passing on higher energy, commodity and grain prices to consumers, many are still finding it difficult to raise prices, according to the Bank of Japan's Tankan survey released Friday.

Uncertainty over the war in Ukraine, further yen weakness as a byproduct of the BOJ's powerful monetary easing, and the pandemic situation at home and overseas, especially in major trading partner China, are making companies cautious, economists say.

Ideas:

The Japanese economy most likely is not going to get back to the pre-pandemic level anytime soon. 

Even as the pandemic begins to fade away many businesses, after two years or maybe not so good sales and earnings are not just going to come back to normal. Some maybe have had two years of losses. 

The inflation situation is not just something that just happened. Its been building for two years, since the pandemic started, and just now is everyone beginning to really feel it in a parts of society and the economy.

And now add in the Ukraine war situation and the variables become even more complex.

Article:

The yen's rapid depreciation to an over six-year low has heightened a sense of alarm among some corporate executives, complicating efforts to ensure a recovery from the pandemic. A weak yen inflates import costs to the detriment of resource-scarce Japan.

"The recovery from the pandemic may be pausing," said Shunsuke Kobayashi, chief economist at Mizuho Securities Co.

"Even if crude oil prices fall from current levels toward $80 a barrel, it would still be hard for the Japanese economy," he said.d

Ideas:

And now add in the weak Japanese yen situation and the situation becomes even more complex. 

There are no easy solutions to overcome all of the interacting variables thats making a recovery from the pandemic easy.

The Japanese economy is very different from the US and the EU in that its a very fragile economy, at present, that is subject to too many external factors due to the fact it has to import a lot of what it needs.

While a weak yen is good for exporters, exporting is not the main driver of the Japanese economy. As a result even a modest increase in exports might not be able to overcome to the challenges that importers are having with the weak yen, meaning parts of the econmy might be doing somewhat good, but most likely many other parts of the economy are not doing very good at this time.

Article:

Kobayashi expects that if commodity prices stay at current levels, import costs for Japan this year will increase by around 11 trillion yen ($90 billion) from a year earlier. West Texas Intermediate crude oil futures were around $100 a barrel on Thursday.

Prime Minister Fumio Kishida has ordered the crafting of a new economic package by late April to ease the pain felt by consumers from higher energy, commodity and grain prices ahead of a key national election this summer.

One of the key pillars would be to incentivize companies withholding price increases for fear of losing sales to pass on costs to consumers and extend financing support for struggling small and midsized firms.

Ideas:

An 11 trillion yen increase in impors costs will be a lot for importers and others to absorb. At some points companies along the supply chain in Japan are going to have to pass on their increaseds costs to whomever in the supply chain including the final consumer.

Any kind budget has got to help consumers even if is crafted to be implemented in stages or smaller steps over time.

Another strategy of course would be to help importers and others in the supply chain with some kind of subsidy or subsidies over several stages again, as an incentive to maybe not pass on their costs to the consumer.

In that way consumers will not see an increase in prices and small and medium sized businesses will not pass on their increased costs. In that way its a win win situation.

The Japanease government can't just use the "let the market" take care of itself. There are too many players at this time that are not doing too good and maybe some Keynesian style government spending is what is needed to help society and the economy.

Article:

To soften the blow to consumers from surging energy costs, the government has been giving oil wholesalers subsidies to bring down retail prices.

But the method can be counteractive, economists say. Gasoline prices lowered by such subsidies may help consumers but will not reduce energy demand and imports, which would further worsen the country's trade balance, a weak yen factor.

Prices are rising when Japan has not seen the kind of robust pent-up demand seen in the United States or Europe during pandemic recovery, and tepid wage growth threatens to sap spending appetite.

Ideas:

An economy is very complex and there are always going to be some positives and negatives.

So while the government has been giving subsidies to oil wholesalers to keep consumer costs low, it might not really be helping in overall economic situation.

Subidies don't increase or decrease overall demand and the same about in volume of imports are the same, meaning because of the weak yen, the higher prices are still going to be there.

For example, the Japanese government gives a subsidy based on what the import oil prices are based just on an increase in oil prices. And now you add in the weak yen situation and the subsidy now might not cover the total increase in oil prices that have increased because of the weak yen.

Robust pent-up demand is a situation where consumers, after two years of maybe not spending so much now feel good that the pandemic is finally winding down and get out and about and begin to spend to make up for maybe two years of not spending so much.

Another report, maybe in 2021 or the end of 2021, for example, said Japanese families had significant savings that could be used for the pent-up demand, whenver the pandemic began to wind down.

But the problem now is inflation maybe is going to be a constraint related to increased consumer spending and despite Prime Minister's suggetions for companies to finally increase wages, which hasn't happened, the pent-up demand seen in the US and th EU just happened yet in Japan.

Article:

The recovery in confidence among manufacturers and nonmanufacturers stalled in the BOJ's Tankan survey for March, after six straight quarters of improvement.

Companies in the closely watched survey expect prices to rise 1.8 percent a year later, the sharpest pace on record.

The reading for output prices among big manufacturers hit an over 41-year high, though the index is still lower than that measuring input prices.

Ideas:

Japanese companies are under pressure to pass on their costs to whomever is next in the supply chain including the final customer but are reluctant to do so, as they know consumers/customers are very price sensitive and they know they could lose sales and customers.

So its like a no win situation for many Japanease companies to just try and maintain the status quo or just try to survive another year of challenges.

Most likely large companies have to resources to overcome the inflation challenges but also most likely smal and medium sized companies don't have the resources and are very reluctant to pass on their increased costs to their customers and as a result their profit margins might get smaller and smaller each month as inflation continues, unless the Japanese government can come up with some kind of package to help them.

Article:

Consumers in Japan, which experienced years of deflation, are sensitive to price hikes.

In a government survey released Thursday, Japan's fiscal state, the economy and the price situation were the top three areas cited by Japanese people as worsening. The data was collected before Russia's invasion of Ukraine sent crude oil and commodity prices surging and the yen's rapid depreciation.

Kengo Sakurada, who leads the Japan Association of Corporate Executives, fired a warning shot against the yen's sharp fall.

Ideas:

Japan's fiscal state is one challenge but the economy and the price situation are two very important areas that effect conumers and companies directly.

Regarding Japan's fiscal state and the debt to GDP ratio, which is the largest in the world, taking action related to it today might not have an effect to reduce it now, but the Japanease government can and should take steps to society and companies now.

And of course find some needed strategies to reduce the debt to GDP ratio without causing harm to society, those in the 65+ age groups, or the economy.

For example in 2014, the Japanease government increased the sales tax from 5 to 8 percent, and in 2019 in October increased the sales tax from 8 to 10 percent. 

In both instances it appeared to be very confusing as to what the products or services the sales tax would be applied to, and the Japanese public seemed very confused each time.

For example in some instances consumer started to hoard some products as they thought prices would become too high. And later in the news they wondered why they bought so much related to some products.

So in 2019 for example it was like a buying frenzy to buy as much as possible before the 8 to 10 percent sales tax went into effect on Oct. 1.

Most likely because of the inflation challenge the Japanease government is not going to use an increase sales tax as a strategy to lower the debt to GDP ratio.

But the challenge is how to lower the ratio without causing major challenges to society or different group in society such as those on fixed incomes.

Article:

"It's not just exporters that are leading the Japanese economy. The service sector accounts for 70 percent of gross domestic product," Sakurada said at a recent press conference. "The service sector is not necessarily structured in a way that welcomes a weak yen."

A weak yen boosts the overseas profits of exporters when repatriated.

For the just-ended business year through March, major Japanese automakers -- Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. -- put their assumed exchange rate for dollar-yen at 111 yen.

Ideas:

If the services sector is really 70 percent gross domestic product, then during the pandemic and probably now that's a lot of lost revenue and sales.

First of course because of the pandemic and people not out and about and doing the ususal -prepandemic type activities but even more now as inflation causes the increases in prices of many products and even some services.

The services sector was the major part of the Japanese economy that was hit the hardest and probably will the sector which takes the longest to also recover.

And now with the weak yen and inflation combined its going to take even longer to finally get back to the pre-pandemic level.

Article:

According to the Tankan survey, the average assumed rate for dollar-yen for the year from April is at 111.93 yen, lower than the 122 yen it was trading on Friday, apparently because companies tend to make conservative assumptions. "It also reflects the view (among companies surveyed) that the yen weakness seen recently will not last," a BOJ official said.

BOJ Governor Haruhiko Kuroda, who has taken the view that a weak yen is positive for the Japanese economy, has not sounded an alarm about the yen's recent sharp fall.

Bolstering the view that powerful monetary easing and yen weakness will continue, the Japanese central bank has shown its resolve to defend its cap on long-term interest rates through rounds of unlimited bond-buying at a fixed rate for four days to Thursday.

Ideas:

The average for the year might be 111.93, but that doesn't help companies now if the yen is at 122. and they are having to pay much for for imported resources they need including energy resources.

Large companies like Toyota and others have the needed resources to whether the weak yen storm but small and medium companies don't and as such they have to pay the yen rate as they see it each day and each week.

Of course Kuroda is going to say the weak yen is good for the economy and even though services makes up 70 percent of GDP exports and major exporters still rule the economy.

But to be fair and honest the weak yen, at the present time, might just be a pass situation that might not last more than 6 months and then the yen begins to get back to some kind of a normal range that benefits most in the economy.

Article:

Increased import costs are not the only negative aspect of yen weakness.

"The economy-boosting effect of yen weakness is extremely small," said Ryutaro Kono, chief Japan economist at BNP Paribas Securities (Japan) Ltd.

"With powerful monetary easing in place, the number of companies with low productivity growth and those that cannot go without the benefits of weak yen is growing," Kono said.

"The BOJ needs to examine not just the short-term economy-boosting effect (of a weak yen) but also its longer-term costs," he added.

Ideas:

The weak yen has both some positive and negative affects as an economy is very complex and its like a puzzle or more like a living organism with many movable parts. 

What might be a positive for some parts of the economy might be an extreme negative for other parts of an economy.

The problem always is what really are the positives and what really are the negatives and what really are the effects of each.

So for the Bank of Japan, its never an easy answer about how to fix this part or manage this part without whatever they do to have some kind of effect on the economy.

For example, even though the US Federal Reserve has increased it rate to try and fix or manage inflation its knows the rate increase is going to be a negative some or many in the US economy.

So again whatever the Bank of Japan does there are going to be some potential positives and some potential negatives that might affect different groups in the Japanese economy.

Have a nice day and be safe!