By Stuart Burns
We set the stage for Japan Prime Minister Shinzo Abe’s Abenomics being the best thing since sliced bread back in Part One of this article – but that may not be the case.
Japanese export volume fell 4.8% in May from a year earlier, the 12th consecutive monthly decline, and import volumes dropped 2.4%.
As the FT points out, foreigners did not actually buy more Made-in-Japan products in May: the finance ministry’s index of export volumes continued to decrease. The weakening of the yen meant that what they did buy was simply worth more, once the proceeds were converted into Japanese currency.
“Exports have been in recovery mode since March,” the FT quotes Yuichiro Nagai, an analyst at Barclays Research, as saying, “but the slower pace of the comeback in volume compared with value suggests that the uptrend is being driven by the yen’s depreciation rather than strong demand.”
So what are the major caveats?
No Demand for Exports?
Carmakers, the FT reports, shipped some 20,000 fewer vehicles abroad in May, a drop of 4.6%, yet the yen value of their exports rose by 5.5%. Prime Minister Abe is counting on exporters to divert at least part of their expanded earnings to wage increases and investment in factories and equipment.
But the continued decline in the physical volume of exports has given companies little reason to bulk up their domestic operations, since they do not need new factories if they are exporting fewer goods – even if those goods are earning them more yen, the FT points out.
Indeed, Japanese companies are sitting on a mountain of cash. Private companies’ cash and deposits rose 5.8% from a year before, to 225 trillion yen ($2.4 trillion), an amount in excess of the size of Italy’s economy or the liquid assets held by American firms, as Bank of Japan data showed in Tokyo, according to Bloomberg.
Where Japanese companies are investing is abroad; the result of all this corporate profitability could ultimately be to benefit economies outside of Japan.
Overhanging all of it is Japan’s aging demographics problem.
With rising debt and an aging workforce, Prime Minister Shinzo Abe’s Abenomics may offer short- to medium-term stimulation, but in the long run, the march of time will rein in any recovery.
Meanwhile, the rest of the world watches Japan’s experiment.