Japan's Impact on Global Commodity Prices

by: Gary Dorsch

Japan is a major factor behind the rise in global commodity prices, with industrial production rising for a fifth month in December to a record, sustaining the nation's longest expansion in eight years. Japanese industrialists plan to spend 17.3% more on factories and production facilities in 2006 than last year. Overseas sales are also bolstering production and imports of raw materials from abroad. Japan imported $451 billion of goods in 2005, the seventh highest among global importers.

Japan's exports rose 14.7% in November from a year earlier to 5.9 trillion yen ($50.2 billion), the second highest ever, on the heels of the yen’s 19% devaluation against the dollar, and 17% drop against the Chinese yuan. Shipments to China rose 12.8% and those to the US climbed 8.9 percent. Exports were up for the 23rd consecutive month while imports rose for the 20th month in a row.

To meet strong demand from abroad, and an economic revival at home, Japanese imports of raw materials have soared 66% to 5.42 trillion yen per month from three years ago, and in turn, providing underlying support for global commodity prices. Japan paid 20% or more for nonferrous metals, crude oil and coal in 2005, which companies are expected to pass on to customers.

Japan’s wholesale price index was 1.9% higher in November from a year earlier, and has been in positive territory for two years, but the Japanese government claims that consumer prices are just emerging from a seven year bout of deflation. But the Japanese wholesale price index tracks major trends in the Reuters Commodity price index, which has risen 91% over the past four years, for an annualized gain of 23%, much higher than the Japanese wholesale price index of 1.9% inflation.

That would imply that Japanese manufacturers are getting squeezed by sharply higher raw material costs, and unable to pass costs along to intermediaries. Yet, large Japanese manufacturers claim their profits are expected to be 5.2% higher in 2005, and the Nikkei-225 stock index rose 40% last year to a 5-year high. If correct, then profit margins might have been inflated by a stronger dollar against the Japanese yen. That explains why the Japanese ministry of finance is jawboning or intervening in the currency markets, whenever the dollar has a rough day.

Global commodity prices bottomed out in late 2001, soon after the Bank of Japan lowered its overnight loan rate to zero percent, and adopted quantitative easing. The central bank prints about 1.2 trillion yen ($10 billion) per month to purchase Japanese government bonds, inflating the amount of yen circulating around global money markets. More Japanese yen yielding zero percent, chasing fewer natural resources in turn, leads to sharply higher global commodity prices.

Monetary Policy: The Japanese ruling elite are devaluing their way to prosperity, by flooding the Tokyo money markets with 32 trillion to 35 trillion yen above the liquidity requirements of local banks. The enormous supply of excess yen pushed Japan’s 3-month deposit rate below zero percent for most of 2004. With borrowing costs at zero percent or less, Japanese and foreign hedge fund traders have found the cheapest source of capital to leverage speculative positions in global commodities.

And the Japanese ministry of Finance is not expected to grant permission to the Bank of Japan to begin mopping up some of the excess yen until the second half of 2006, at the very earliest. On January 9th, Japanese Finance Minister Sadakazu Tanigaki said, "There is a need for the BOJ to make a careful assessment of data. It should not rush things.