So
What is Really Going on With Japanese Exports?
March 6, 2009
by
Bryan Banish
Each day I read
headlines implying that the Japanese economy is imploding.
Clearly the government is a basket case and any chance of
the Aso government passing a stimulous package is nonexistent.
The headlines go further with references to “exports
falling off a cliff” and stock market near 26 year lows.
The Nikkei 225 is still above 7,000, a level it breeched
back in October but it is true that the Topix (a broader
measure), hit levels not seen since 1983.
Much of the blame is put on the strong yen and weak
exports. By the
broadest measure, Gross Domestic Product,
Japan’s 4.6% drop in Q4 from the same
quarter in 2007 is a figure much worse than the United States and Germany.
However, should this be combined with Japan, Inc.’s dire
warnings about a strong yen and an export freefall and conclude
the Japanese economy is worse than any in the world?
Actually, no.
So what is the situation
with exports?
It is true that Japanese exports have been declining at a
pretty rapid rate.
However, the cliff analogy implies that somehow the economy went
from dismal to worse in recent months.
In fact, it has much to do with the Japanese Yen and the
flight to safety late last year that is amplifying the export
numbers. I’ll
explain but first, let me say the country is in bad shape,
politically and economically. However,
that should not be anything
new,
simply a return to life a decade ago.
This is sad but not a calamity.
A typical Prime Minister might last for two years in Japan and a few month stint is not
unheard of. Japan is on its third government
since Junichiro Koizumi, the popular, reformer Prime Minister
that stepped down two and a half years ago.
Present, PM Aso has approval ratings that are what you
might expect of George W. Bush as rated by Europeans, that is to
say, essentially zero.
The fourth post-Koizumi government is likely coming soon.
Koizumi’s five years in office coincided with a global
expansion of credit and consumption binge that drove exports to
the US and around
the world. These
exports, dominated by auto sales in the
US, brought an end to
Japan’s ‘lost decade’.
So did the US auto market’s
rapid decline just usher in the beginning of the next lost
decade? A deeper
dive shows something more going on.
A look
at the trade numbers to the right here shows a steep drop from a
run rate of about 7 trillion yen (about $75B) per month down to less
than 5 trillion yen per month.
So is this simply the fault of
the
recently frugal
US
consumer? Hardly,
looking back over the last two years is the largest country
consuming Japanese exports is the US at 19% but China is right behind at 16%.
Combining China
with other countries in the region you see that
Asia
is the destination of nearly half of Japanese exports.
So what dropped off at the end of last year?
Regularly updated bilateral trade data is often hard to
come by but thankfully Japan publishes this monthly.
Monthly data is a bit noisy, particularly at the country
level so I compared the December’08 figures to a two year
average of Japanese exports by country and found that the
US,
China, other Asia and European exports are all down about the same amount, about
30%. Exports to the
U.S.
(Autos, cameras, car parts, and copiers) and exports to China (semiconductors, steel,
chemicals, and plastics) are off virtually the same amount.
This is a little strange given that the U.S. is supposedly flirting with depression yet China
will only have moderated growth (IMF forecasts for GDP growth is
now down to 6.7%).
So how do exports to the U.S. and China compare?
To this point it is interesting to put Japanese exports
to the U.S.
and China
next to each other.
The statistics are in million yen but it is really only the
trend line that is important.
Japanese automobile exports (yellow line in left graph)
to the US have been in decline since late 2007 when the
recession in the US formally began and have been slowly cut in
half from the peak of near 500 billion yen or $5 billion (auto
exports are about 5 times larger than the others on the graph
and use the right axis).
Car parts, office equipment, and automobile sales have
all declined of late but only the smallest category containing
digital cameras and camcorders have experienced a sudden and
sharp decline. The
other categories were simply a continuation of a downward trend.
The exports to China, on the other hand had been
increasing through July 08, showing a modest decline through
September and all dropped abruptly from October to December last
year. Exports to
the U.S.
(other than auto parts) are primarily end products sold to
consumers where most exports to
China
(chemicals, plastics, and semiconductors) go into the
manufacturing process.
This implies that sooner or later, the Chinese
manufacturing sector will be in outright decline rather than
simply slower growth.
It is true that Chinese government stimulus spending on
infrastructure can keep the demand for steel products propped
up. However, if the
flow of Japanese chips (semiconductors) that go into
manufacturing process of cellular phones and other electronics
is slowing, the output of those factories must soon decline.
So
what about the yen?
The strengthening of the yen has a number of affects on
Japanese companies.
With many of their costs in yen and sales prices in U.S.
dollars, export profits for Japanese companies take a big hit
when the yen suddenly strengthens like it did last year.
Companies like Toyota (NYSE ticker: TM)
and Sony (SNE) are quite sensitive to this and have gone into
crisis mode. But
the affect on trade figures are being amplified as they are
reported. In the
graph below the upper two lines show the same trade of goods as
reported by the Japanese government in yen and the U.S. government in dollars.
It is the same amount of goods just as seen from the port
of send off in one currency and the port of arrival in another.
Thus they should move roughly in lock step, which they
do. In this graph
they are both normalized to January 2007 levels on the left
axis. The yellow
line is the month-end dollar-yen rate, which took a big dive
from August 2008 though the end of the year.
As described earlier, the trend has been down since late
2007 but any abrupt acceleration down (in yen terms) was not so
much that the trade of goods go even worse but that the strong
yen meant that the Japanese government could count those goods
for even less.
And going forward?
While monthly trade figures for 2009 are not yet out, the
yen has weakened and has approached the 100 yen/US$1 level
recently. If this
trend continues or simply that the exchange rate stays near 100
yen/dollar throughout March, the trade numbers as reported by
the Japanese government should stabilize even if the underlying
flow of goods declines further.
This 10% improvement in yen exchange rate since year end
also means that Japan’s
beleaguered national champions like
Toyota
and Sony are likely to see some stabilization.
Clearly, they have far too much capacity but with strong
balance sheets, they are not going out of business.
The Tokyo stock market is at
very low levels but the major Japanese companies demonstrated
that they know how to manage through a protracted recession.
There might be more values in the big Japanese stocks
than in the Dow. Toyota, for example, will emerge from this
recession stronger than its rivals.
It is hard to be as emphatic about the prospects for
Sony. It has a
bright long term future but the politics of Sony management or
its overly broad line of businesses might cause the ‘long term’
to be pretty long.
Another option in the consumer electronics space might be Canon
(CAJ). All three
have American shares listed on the NYSE.
For more see:
http://www.individualglobalinvestor.com/Japan1.html
