Fisher Investments Editorial Staff
Geopolitics, Capitalism, Trade

Talking Tokyo

By, 12/28/2011

While much of the world was seemingly recovering from holiday gorging, Japan was busy negotiating pacts, releasing economic data and politicking. Here’s a brief survey of the major headlines.

China and Japan relations

On Christmas Day, Japanese Prime Minister Yoshihiko Noda met Chinese Premier Wen Jiabao to discuss the two nations’ economic relationship. The result was a new pact, largely motivated by currency policies—China seeks a more globally accepted yuan, while Japan wants to benefit from a strong yen by promoting external investment. While details are still pending, the pact has two main thrusts: Enabling direct yuan-yen trade and permitting Japan to purchase Chinese sovereign bonds in its foreign exchange reserves.

Companies currently conducting cross-border trade between China and Japan often have an intermediate step—converting first to US dollars, then to the yen or yuan. This all adds costs—and hassles. The pact seeks to remove the intermediate step, simplifying trade. And in that way, this measure has a real benefit to both countries. Permitting Japan to buy China’s sovereign debt, however, seems largely symbolic. Most expectations are Japan will likely only buy around $10 billion—less than 1% of Japan’s $1.3 trillion foreign exchange reserves.

But all in all, whether merely symbolic or more real, the China-Japan pact does acknowledge the yuan’s growing role in the Asian economy. And it’s another incremental step toward greater liberalization of China’s financial system—likely a long-term necessity for its economy. But this move, and others in the not-so-distant past, are merely small steps forward. The yuan is still pegged to the dollar and its capital markets are still tightly controlled. China has a long reform road to travel for the yuan to be globally accepted on the level of the dollar—the world’s reserve currency of choice (a status unlikely to change anytime soon). Or, for that matter, the yen.

Japan’s earthquake recovery continues

Elsewhere in Japan, a flurry of economic reports were released. And taken in total, the readings show recovery from March’s earthquake continues.

In the disaster’s aftermath, monthly motor vehicle production fell from February 2011’s 795,000 units to a trough of 292,000 units in April. But since that time, automakers have been recovering. In November, vehicle production rose 4.5% y/y to 838,000 units—the second consecutive year-over-year increase and third month of above pre-quake output.

Construction orders received by Japan’s 50 biggest builders—likely influenced by reconstruction efforts—surged 21% y/y in November following October’s 24% y/y increase. And while November housing starts logged a -0.3% y/y decline, that easily topped analysts’ estimates of -4.7%.

With all that said, it still seems a stretch to say Japan’s economy is robust today. In fact, the Bank of Japan recently lowered its estimate of fiscal 2012 GDP growth to +2.2%, primarily citing a strong yen’s impact on exports. But at the same time, the disaster’s disruptive effect on supply chains—which likely contributed to slower global economic growth rates this past summer—seems mostly behind us now.

Politics as usual (for Japan)

In other Japan news, 10 members of Noda’s Democratic Party of Japan (DPJ) announced they’re leaving the party. DPJ tensions simmered in November over Noda’s decision to join Trans-Pacific Partnership talks, but now they’ve seemingly boiled over due to the 2012 budget. 

Rebel lawmakers took issue with two provisions: Resuming a long-shelved dam construction project and increasing sales tax from 5% to 10% by mid-decade. The unpopular dam has become a totem of spending on unwanted public works—Japan’s “bridge to nowhere,” if you will—and some see the sales tax as a means to support that and similar spending. And that’s nearly exactly counter to the DPJ’s 2009 election manifesto of no new taxes and less spending.

Given the tax increase’s unpopularity among citizens as well as lawmakers, it faces a tough, uncertain road. As does Noda himself. While a politician backtracking on a campaign promise is basically politics as usual virtually anywhere, this is Japan—land of seven prime ministers in the last six years. So while it appears the 10 legislators’ exodus likely won’t break up the DPJ, Noda’s public support has waned considerably—meaning Japan’s revolving prime ministerial door could turn again in 2012.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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