Japan's Economy Caught In Deflationary Downward Spiral; Exports Plunge, Prices To Follow

By: Mike_Shedlock

Recessions have taken their toll on Asia exporters. Inquiring minds are reading Japan Exports Drop Record 49% as Global Slump Deepens .
Japan's exports plunged a record 49.4 percent in February as deepening recessions in the U.S. and Europe sapped demand for the country's cars and electronics.

Shipments to the U.S., the country's biggest market, tumbled an unprecedented 58.4 percent from a year earlier, the Finance Ministry said today in Tokyo. Automobile exports slid 70.9 percent.

The collapse signals gross domestic product may shrink this quarter at a similar pace to the annualized 12.1 percent contraction posted in the previous three months, the sharpest since 1974. Prime Minister Taro Aso is compiling his third stimulus package as companies from Toyota Motor Corp. to Panasonic Corp. fire thousands of workers.

Sharpest Since 1980

Last month's drop in exports was the sharpest since at least 1980, when the government started to keep comparable data. Economists predicted a 47.6 percent decline.

Toyota, forecasting its first net loss in 59 years, yesterday said overseas shipments plunged 69 percent in February.

Demand fell across all regions. Exports to Europe dropped a record 54.7 percent, shipments to Asia declined 46.3 percent and goods sent to China slumped 39.7 percent.

Imports fell a record 43 percent, helping Japan post its first trade surplus in five months. The 82.4 billion yen ($842 million) surplus was still 91.2 percent lower than the same month a year earlier.

Sentiment among Japan's largest manufacturers probably fell to a 33-year low this month, economists predict the Bank of Japan's Tankan survey will show next week.

Finance Minister Kaoru Yosano said on March 22 that a new stimulus package of as much as 20 trillion yen, double the amount pledged since October, is “not out of line” as the world's second-biggest economy heads for its worst recession since 1945. The spending would add to public debt already estimated at 170 percent of gross domestic product.

Japan's Public Debt Nightmare

Japan' public debt is 170 percent of GDP, the highest in the G20. Increased debt is all that has been accomplished by Keynesian silliness and Monetarist nonsense. Meanwhile the debate in the US between Krugman in the Keynesian camp and Mankiw in the Monetarist camp has shifted.

Both now think that quantitative easing is a good thing. The only difference is that Krugman wants to call it qualitative easing. Please see Krugman's $200 Billion Lunch for details.

Central Bank Interest Rates Idiocy In Japan

Japan's interest rates is .1%. Amazingly Deputy Governor Hirohide Yamaguchi somehow sees the need to announce BOJ Won't Rule Out Further Rate Cuts .
The Bank of Japan won't rule out additional reductions to the benchmark 0.1 percent interest rate, Deputy Governor Hirohide Yamaguchi said.

“It's not as if there's absolutely no room for further rate cuts,” Yamaguchi, 58, told reporters today in Otaru, northern Japan. “This option isn't completely ruled out at this stage.”

Yamaguchi said the policy board would need to assess the impact of further rate reductions on money-market trading. [Meanwhile BOJ Governor] Shirakawa has repeatedly said lowering the overnight lending rate to zero percent should be avoided because it would make trading in short-term markets unprofitable.

Governor Shirakawa said in parliament today that there's no immediate risk of a deflationary spiral. When all you have room to cut is .1%, it is ridiculous to be pretending there is "room for cuts" or those cuts could possibly accomplish anything.

Japan's Deflationary Spiral

Please consider Japan's Consumer Prices Probably Stalled for a Second Month .

Japan's consumer prices were probably unchanged for a second month in February as the nation's recession deepened.

A record drop in exports is forcing companies to fire workers, depressing wages and consumption and pushing the nation closer to its worst recession since 1945. Prices will probably start falling as soon as next month and their declines will accelerate, analysts said.

“Core prices are already on the verge of slipping into negative territory,” said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. “Prices are definitely southbound and the risk of deflation warrants caution.”

The world's second-largest economy contracted at an annualized 12.1 percent in the three months ended Dec. 31, the fastest pace since 1974.

“The rapid deterioration in the economy will continue to widen the supply and demand gap further, adding downward pressure on prices,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo.

One board member said consumers' attempts to cut living costs and companies' discounting may exercise “further downward pressure” on prices.

Aeon Co., Japan's largest supermarket operator, last week said it will reduce prices of 5,100 items this month, attempting to lure cash-strapped households. Rivals Ito-Yokado Co. and Seiyu Ltd. already cut prices of food, clothing and household products this month.

The article above continually refers to deflation as falling prices. As I have pointed out many times that is a poor definition. See Humpty Dumpty On Inflation if you need a refresher course on what inflation really is. That done, it is clear Japan is already back in deflation, along with the US and UK.

Note that years of quantitative easing did not prevent Japan's deflation from reoccurring, nor did years of Keynesian building of bridges to nowhere.

Yet Geithner says "This plan will work. This plan because of the authority provided not just by Congress but the treasury and the Fed gives us broad ability to do what you need to do to get through a financial crisis like this. It just requires will; It's not about ability. We just need to keep at it. We just need to work with Congress to make sure we do this on a scale that will make it work. "

Supposedly Geithner's will is more powerful than the markets. Ability is not even needed. If willpower doesn't work, Geithner solution is to scale up until it does. See Geithner's Arrogance Knows No Bounds for details.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

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