90 seconds at 9 am: Japan in trouble

Japan slumps, options from here look desperate; HSBC accused of fraud; Carney wants to control banker salaries; AU-China FTA to boost property; NZ$1 = 79.4 USc, TWI = 78.7

18th Nov 14, 7:24am by David Chaston

Here's my summary of the key news overnight with news of a new impetus to control banker pay.

But first, the big news late yesterday is that Japan has slipped back into recession with a surprise contraction in their economy in Q3 2014. Just about everyone was expecting a +2% growth; instead they got a -1.6% decline. Remember, Q2 GDP declined -7.3% but that quarter was in the shadow of a GST rate rise.

This is serious for Japan, and will reverberate here. Not only does it undermine the Abenomics program, our almost NZ$2 bln in trade with Japan will come under pressure.

The surprise recession sets the stage for a delay for the second GST hike and there is now likely to be a snap election, two years early. These GST rises are supposed to 'pay' for the huge run-up in money printing; without them the Japanese Government's debt levels will skyrocket and that are already at extreme levels.

However. a key adviser to the Japanese Prime Minister has suggested this morning that tax cuts as well as cash handouts be part of a new stimulus package. They are getting desperate.

In Europe overnight, HSBC has been accused of fraud in Belgium. Authorities in Brussels have charged HSBC's private banking arm, which is based in Switzerland, with assisting wealthy Belgians - including diamond dealers - in avoiding taxes.

In Singapore, Bank of England governor Mark Carney said European caps on bonuses were distorting the ability to claw back pay and that salaries might need to be regulated as well.

In Australia, the AFR is reporting that the FTA deal signed between China and Australia yesterday will see an influx of Chinese money into Australia’s real estate market. The claim is that the agreement would accelerate the flow of Chinese investment funds into the local property market, get projects built that would not otherwise have been viable and "give Australian buyers access to properties that otherwise would not have been developed".

In New York, UST 10yr bond yields are virtually unchanged in mid-afternoon trade at 2.33%.

The oil price is slightly lower, now below US$76/barrel with the Brent price under US$79/barrel.

The gold price is marginally higher, now just over US$1,187/oz.

The NZ dollar has moved up firmly again overnight and is just over 79.4 USc, has touched 91 AUc, and the TWI is at 78.7. That's its highest level in two months.

If you want to catch up with all the changes yesterday we have an update here.

The easiest place to stay up with today's event risk is by following our Economic Calendar here »

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49 Comments

by raegun | 18th Nov 14, 7:36am 1416249404

So, Japan is in "trouble". Why are we not looking at this a different way. This is the sort of "trouble" that the whole world needs to face, a falling population. Isn't time that this was turned around so that the positive of this can be seen. This is an opportunity to work out how we can actualy continue to prosper without all this growth nonsense, to which there is a limit.

My answer to it is to realise that we will have go into reverse from all of this economy of scale claptrap for starters

by Stephen Hulme | 18th Nov 14, 9:09am 1416254956

It's not just Japan.

It is probably not a coincidence that just as we learn that "China’s bad loans jumped by the most since 2005 in the third quarter, fueling concern that a cooling economy will be further weakened as banks limit lending to avoid credit risks" that we also learn that in the month of October, China once again slammed the brakes on credit creation, with total new loans dropping to RMB548 billion from RMB857 BN, below the RMB626 BN expected, the lowest monthly expansion in 2014... Read more

Where's that canary in the goldmine when it is needed most?

by economist | 18th Nov 14, 9:36am 1416256614

....but Japan needs growth to pay the interest on its debt....

A strinking working population = strinking tax base, while at the same time its debts continue to grow ever higher. They can default outright and let the chips fall where they may, or they can print and keep printing, consequences be damned. I would guess they go for the latter....

by raegun | 18th Nov 14, 10:34am 1416260095

Taxes are going to be the least of the planet's problems unless we address our over-population of it

by raegun | 18th Nov 14, 10:36am 1416260209

PS. Strinking?

by economist | 18th Nov 14, 10:57am 1416261478

Shrinking... sorry. Maybe some of the worlds over-population as you put it will come to NZ... wait they are already doing that....

by raegun | 18th Nov 14, 11:35am 1416263758

By some estimates the world is already a couple or 3 billion over populated, shifting them around will sort nothing out, in a sort of deckchairs and Titanic way

by steven | 18th Nov 14, 3:41pm 1416278472

Actually 5+ billion are the estimates I have seen.

Still the americans have a lot of guns and ammo. I mean if they can kill 10,000 of themselves every year what can they do if tehy really try? Funny really, instead of zombie apocalypse they are so petrified of they could get starving millions migrating looking for food if this keeps gets worse.

regards.

by raegun | 18th Nov 14, 4:54pm 1416282877

I understand that reasonable estimates that for their to be enough resource on the planet for us all to live the rough equivalent of a European lifestyle, there is only enough for about 3 billion of us.

by steven | 18th Nov 14, 5:30pm 1416285016

about x2 of what I have read. Still way less than 7+.

regards

by economist | 18th Nov 14, 7:27pm 1416292059

I think on reasonable estimates even the Europeans themselves can't afford their lifestyle raegun, not to make mention of the Japanese or Americans too of course... but for the time being they can borrow to cover the income shortfall and spend like there is no tomorrow.... oh well, 'the poor you will always have with you'.

by cowboy | 18th Nov 14, 7:30pm 1416292202

don't kjnow what you're talking avbout ... all the investers and shareholders seem rich...

by raegun | 18th Nov 14, 8:21pm 1416295293

Too many people or not has NOTHING to do whether anyone can or can't afford it, it is about resources and how much of that there is and there is not enough to go around the numbers we have, that will also be probably why people can't afford things

by economist | 18th Nov 14, 8:38pm 1416296324

Yet the 'numbers we have' seem to be surviving just fine. Many millions go about their day every day quite happy, despite not having a 'European' material lifestyle. Sure they may not ever have a car, or a tv, or send their kids to higher education, or take overseas holidays, or install a heat pump in their mud hut, or make minimum wage, but happiness for them is so much more than all these things...

Because such will never have a European 'western' material lifestyle somehow I think isn't justification for reducing the world's population.

by cowboy | 18th Nov 14, 9:37pm 1416299858

actually no many of them do - they speak of things such as "white persons privilege" (re: Eurpoeans) and the say things like "living like whitey") or saying we shoudl have all the access to the toys other countries have. They jump up and down about not being in the 1%. Or they have trade aid and charity systems, or protectionist tariffs. Or simply aren't allowed to speak up up the poverty in their lives, or worse just expect that's the way it must be so tell themselves that they have it better tha someone else so it must be good or fate or god's will...or they simply don't know.

Not that the fancy European lifestyle is good (or affordable)... because many of us are just as imprisoned in our debt/tax cycle,

by Plutocracy | 18th Nov 14, 9:38pm 1416299891

Yet the 'numbers we have' seem to be surviving just fine

At this current time this is true. However, we're currently drawing down non-renewable resources + renewables at a faster rate than they regenerate. At some point in the future sustaining our current numbers may not be possible. Long-term carrying capacity is much lower than our current population, one way or another we will eventually be getting back to that number.

by raegun | 19th Nov 14, 6:37am 1416332261

Economist they are NOT doing fine and those of us that think we are are seeing rain forests destroyed for palm oil, fish stocks falling because of over fishing, climate change.

Why are you afraid of the human population reducing itself, Japan is doing it without anyone racing around with a machine gun wiping out every third person or anything stupid like that.

Are you some kind of religious nut that thinks every sperm is sacred or is it that you wish to see continuing growth as you are profiting from it?

If you want us to reduce our lifestyles to those of rag pickers in India then fine, but you go first, ok, but if we reduce to a point where the planet can sustain us, then maybe the rag pickers can have some sort of better future than what they have.

by economist | 19th Nov 14, 10:03am 1416344610

Good grief.... It not just Japan, its most of the western world whose population is decreasing (most of Europe for example) raegun (NZ, Aust, are more the exemption, not the rule). Everybody is watching Japan as its ahead of the curve - if it can find a solution (so far it hasnt) then others can follow. My guess is it will just keep printing as thats by far the politically easier solution and kick the can down the road, or at least make it a 'managed decline'. But no one is doing QE because they think its a good idea, they are doing it because they see it as the least bad option.

I plan to updat my car shortly to a SUV - (CX-5) it will use half the fuel, I think the world will muddle through and be fine. Yes, wars will happen (we have had a unusually good peaceful run last 30 years or so). Yes there will be economic crisis, some banks will probably collapse and people will loose their savings. Yes there will be winners and looses. But the world will muddle its way through.... Im not going to loose sleep over any of these things - all of which will happen over the coming years Im sure. But I live in the most prosperous exciting time in the history fo the world, its fantastic. I'd rather live now than at any time.

by cowboy | 18th Nov 14, 8:01pm 1416294060

thats just supply side economics meeting "rying 'make things cheap' by spending more money to buy production" ... for some reason you need a exponential growth population to keep doing that...

by raegun | 19th Nov 14, 6:36am 1416332213

I think you do and I think the way the human race will be able to prosper without growth will be by de-corporatizing

by Boatman | 18th Nov 14, 9:40am 1416256823

Japan's structural problems are decades old , but a new recession will impact the world economy in due course

I wonder which other Asian economies are staring down a barrel , and we just dont know about it yet .

China ? South Korea? Taiwan?

by Stephen L | 18th Nov 14, 10:10am 1416258630

It sounds like Japan may finally be thinking about doing what they should have done years ago- a bit of helicopter Ben. (something Bernanke preached as an academic, but didn't actually do when he became Fed Chairman)

Japan has still a significant current account surplus, and has years and trillions of built up foreign assets, so Japan Inc doesn't have net debt at all. Yes its government has massive debts to its own people who in turn have massive savings.

They have plenty of scope to print money and hand it to their people. They have used their currency/monetary policy in an orthodox but flawed manner to date- making credit easier to get, or in blowing asset bubbles, (especially overseas, where the Japanese will be massive ownerers of aour assets) but very little to actually encourage consumption and therefore production at home.

The challenge will be to break their cultural preference to save and grow wealth rather than consume. A bit of cash around, generating some inflation, should nudge things along.

by Roger Witherspoon | 18th Nov 14, 10:36am 1416260203

Absolutely. They are in the process of monetising the massive debts they ran up in the 1980s. There is no problem in the Japanese government running a deficit and their reserve bank mopping up as much Japanese government debt as they see fit, as they are denominated in their own currency. If they do it too fast they may get too much inflation, but so far they have been doing it too slowly and therefore have not enough inflation. Reducing taxes and paying cash bonuses sounds right to me - they have a very large historic debt problem to sort out.

Helicopter Ben got his ideas from the Japanese Finance Minister, Korekiyo Takahashi, whose policies made Japan the country that managed the 1930s Depression era best. Unfortunately, Takahashi's brilliance led to his demise; when the time came to rein in government spending the military (prime beneficiaries of government largesse) had his head chopped off in his sleep. Sad but true.

by Stephen L | 18th Nov 14, 10:42am 1416260543

Roger, I didn't know the Japanese history- an interesting story, thanks.

Evans Pritchard in the Telegraph puts it better than me here.

Even he doesn't quite get to the straight cash handouts, but it is pretty close.

by Roger Witherspoon | 18th Nov 14, 10:53am 1416261216

Yes, it was Ambrose Evans-Pritchard who put me onto Korekiyo Takahashi. I find Ambrose the best commentator out there due to his immense historical perspective. He never mentions the unintended consequences of Takahashi's policies - the militarisation of Japan and the miltary coup that caused his death, not to mention Japanese aggression in WW2. It is a most sobering tale.

http://socialdemocracy21stcentury.blogspot.co.nz/2011/08/takahashi-kore…

by Stephen Hulme | 18th Nov 14, 11:14am 1416262453

There is no problem in the Japanese government running a deficit and their reserve bank mopping up as much Japanese government debt as they see fit, as they are denominated in their own currency.

The resultant yen carry trade and the inevitable asset mal-investment, including speculative forays into other nations' economies is an issue in need of a solution. The latest bout of Japanese investment in the UST bond market, alone, caught some serious players off guard. Read more

by Roger Witherspoon | 18th Nov 14, 11:34am 1416263660

Ah, yes, no problem for Japan, that is; at least in theory. Practise may well differ, as Korea and China will doubtless retaliate, and not necessarily in like manner, but they will retaliate in their own way and in their own time. Interesting times ahead methinks.

by steven | 18th Nov 14, 3:23pm 1416277380

Helicopter Ben tried to though, Congress stopped him making it big enough and targetted enough.

"massive savings." indeed and the Govn currently pays almost zero interest and the retirees will start to spend that down. So the Q is then is the Govn going to default on paying back that money or go out into the world an pay commercial rates? oh boy does that like like caught between a rock and a hard place.

"nudge things along." oh back to the growth please mantra on a finite planet with no cheap oil left....so...?

regards

by Ergophobia | 18th Nov 14, 12:08pm 1416265721

So the Mugabe Option aint worked out too well for the Japs - and to think, Bernard and his mate raf wanted the RBNZ to try it too! What a laugh.

by wtf | 18th Nov 14, 1:31pm 1416270666

Ah the Mugabe Option would be hyper inflation, not the deflation Japan has. Hyper inflation requires the complete loss of faith in the economic system and political/social breakdown as well as massive monetary expansion eg Zimbabwe, reparation destroyed Germany or US Civil War.

The Public Credit advocates are correct. What do you think bank credit/debt is? "Money" creation with interest attached. Most of it is in mortgages therefore property speculation and property inflation. If the govt/RB created more and restricted the banks by an equal or greater amount it would not be inflationary (unless the international finance elite decided to dump on NZD for restricting its profits)

by steven | 18th Nov 14, 3:18pm 1416277085

Rubbish, the Japanese "experiment" avoided deflation, sure they are still in a bad way.

and your solution is what btw?

On top of that I dont recall BH saying lets print, can you point us at that URL?

regards

by Ergophobia | 18th Nov 14, 2:49pm 1416275366

The Mugabe Option is the action of "printing money" with abandon, either cash or credit; hyperinflation is/was one consequence. Japan is not Rhodesia but it (QE) is still going to ruin the country - and all others who act so foolishly. Wait and watch the US and UK return to the trough.

by steven | 18th Nov 14, 3:11pm 1416276660

I love it how the inflationistas always come back to we are going to have hyper-inflation I tell you!!!!

After 6+ years that hasnt happened so now the new song is still "hyper-inflation" but well if not well something equally as bad (I assume) but un-specified will happen to us. So we get swallowed by giant rats? collide with an asteroid? um deflation? no idea what? just its going to be bad? blah...

ie no matter what the [bad] outcome it will have been printing that caused it. Total logic failure IMHO.

Also there is a difference between printing cash and expanding credit btw, printing dumps money into the economy permanently. Credit gets repaid and hence cancels out the inflationary effect when that happens as it can be/is removed. Meanwhile we dont get and have not got inflation because the world is in a zero bound trap. This however seems to be uniquely recognised by Keynesian economics (and maybe minsky) who even offer a solution to it. All the other "schools" of economics dont aknowldege such exists (as far as I can tell) and have no solution except austerity (which failed, worse made things worse) rrase the OCR which failed, worse made things worse.

Meanwhile Japan with its stimulus is still only just staving off deflation and we are not talking a wee period of a few dollars off here but 1930s style collapse over an extended period.

So when you see that mountain of evidence that certian actions make things worse and opposing actions make things better, no matter we'll do the first and keep doing it thanks...

oh boy....

regards

by Andrewj | 18th Nov 14, 3:41pm 1416278485

What if China floats its currency. The view appears to support a significant fall, deflation exported and a lot of money that recently fled returning in a hurry.

http://sustainablepulse.com/2014/08/21/glyphosate-sales-boom-powers-glo…

by steven | 18th Nov 14, 5:41pm 1416285703

Why would the money return if its been exported to hide it?

regards

by profile | 18th Nov 14, 4:34pm 1416281681

That would be the pot callign the kettle black wouldn't it?

"I love it how the inflationistas always come back to we are going to have hyper-inflation I tell you!!!!

After 6+ years that hasnt happened so now the new song is still "hyper-inflation" but well if not well something equally as bad (I assume) but un-specified will happen to us. So we get swallowed by giant rats? collide with an asteroid? um deflation? no idea what? just its going to be bad? blah...

ie no matter what the [bad] outcome it will have been printing that caused it. Total logic failure IMHO."

by steven | 18th Nov 14, 5:29pm 1416284958

really?

Lets see how it goes eh?

How are your shale oil stocks doing? sagging as the oil price sags?

Who would have guessed?

regards

by steven | 18th Nov 14, 5:39pm 1416285540

Oh and for 6 years I think I have been pretty consistantly saying no we wont have inflation.

Despite all the bank economists and the likes of Roger etc saying otherwise.

Look that up.

regards

by profile | 18th Nov 14, 7:41pm 1416292916

It's just the six years you've been telling us we are running out of oil in two years and other such doom laden "projections". Sorry to disappoint - never owned an oil share.

by steven | 19th Nov 14, 7:38am 1416335899

Actually no, there you go twisting the truth again. I have not said we are running out of oil in 2 years. 40 years ie about 2050 yes. What I have said and stand by is Peak oil which is about flow per day is about now +/- 5 years or so. It seems you are unable to grasp such simple things.

Meanwhile what we are running out of is oil we can afford to pay for when we have a growing economy.

No oil shares, but didnt you say you had made some investments in that area? no? nothing related to fossil fuels at all?

regards

by economist | 18th Nov 14, 7:58pm 1416293928

What do you mean no inflation? In the last 6 years the CPI is over 11% - that leaves out the price of buying a house (which in Auckland property inflation has been way more than 11%, my house has gone up on GV 300,000 just in the past 3 years, but its the same house, I'd call that inflation).

http://www.stats.govt.nz/datavisualisation/cpi.html

If there was no inflation - all those people on minimum wage should be dancing in the street - they are a lot richer and better off than 6 years ago - the minimum wage having increased by 19%. They need to be quite and stop grumbling about a 'living wage' - they are better off now than ever.

by cowboy | 18th Nov 14, 9:44pm 1416300260

my three houses dropped 3% since purchase. 1% drop last year.

and yeah, simple walk through shopping center says prices are up. Bread is $3.50+ loaf, compared to 2.70, petrol 2.20 c.f. 2.05, electric always going up as line charges ... you noticed they finally starting cutting the feedin credits for PV :/ so much for support for sustainable and no emission electricity.

IIRC cow and white and brown prices have eased, which is more about new stuff hitting the market and depressing the price of the old stuff. consumables (which spring from commodities) all up. Which is perfectly in line with minimum wage pass-on, gst increase, interest increase pass-on, and electrical cost pass-ons. what someone actually thingks increases those costs will _reduce_ cost of living? lol.

by steven | 19th Nov 14, 7:33am 1416335580

Oh here we go again. How did gold do in 6 years? 33% loss? so massive deflation? Oh and didnt you predict $3000? and we'd see significant inflation? Instead its staggered along at the bottom of the desired range.

11% over 6 years is <2% per year, negligable inflation annually. Anually which is the normal way to measure it. Plus you have to watch the trend because once an economy is in deflation history has shown that is very hard to turn around especially when the OCR gets to 0.25%. Watch japan with interest I suggest.

So cherry picking stats to suit yourself achieves what?

Houses are not in CPI as they are an investment, and rent? pretty flat it seems. Oh and houses in the rural areas went up by how much on average last year? Just because some ppl are going crazy on houses like others did on gold does not make it inflation.

What are you going to claim when the housing bubble pops?

"dancing in the street", well CPI is a basket of goods, every day goods. Lets also not ignore what prices are droping in the overall cost of living.

regards

by economist | 19th Nov 14, 10:27am 1416346042

I know I am probably going to regret even commenting but....

1. Gold or any item dropping in price is not 'massive deflation' steven, (neither is one item going up in price), inflation and deflation are measures of price levels in an economy. Gold is a hedge. Its real money. Its an asset. Its a currency steven. Its traded as such and has been for years. Its the only real competition for a reserve currency to the USD. To protect the USD they flood the market with 'paper gold', everyone knows this, the US Treasury even admits they manipulate the price as per previous links I have put up (which is why I have said never to trade it). Gold is still insurance. At the end of the day less than 2% of my net worth is in it, its long term asset protection steven. Didnt you predict massive oil price increases - yet here we are and it is cheaper. If gold drops I will probably buy more, because there is only one way this whole thing can end, and I certainly dont want a lot of wealth in bank deposits with nothing behind them to back them. I know most of the western world can't see this, but the western world is in long term decline, their vote will count less and less. My vote is the powers that be will print and print until their currency is ruined. Unfortunately they dont have much option.

2. Inflation. It doesnt matter which term you measure it over - its still the same thing, inflation. CPI isnt cherry picking steven, the CPI tracks goods and services across a large range. It includes also as you put it 'prices which are dropping in the cost of living'.

3. So you see houses as an 'investment'. Fair enough. What am I going to say if AKL houses drop in price? I'd say they were too expensive in AKL anyway, which is what I am saying now and why I am not buying another investment property in AKL.

If you recall my previous posts I said I'd rather be in real assets including gold and real estate etc..., and over the last few years my wealth has increased more than at any other time, I have less leverage than ever and Im hedged, so I'm still sticking to my real asset strategy - is AKL overpriced - probably, but I hope you enjoy the cherrys you are picking....

by steven | 19th Nov 14, 11:41am 1416350504

I have no particualr aversion to CPI as long as I take it "with a pinch of salt" when its per year and not per whatever time span you wish to choose.

On saying that I prefer the core inflation measurement as it takes out volitility.

Oh so gold or an asset dropping in value 30% isnt deflation but houses increasing in value is?

Ooooookkkkkkkk.

No problem in what you would rather be in, that is your choice, I am not so inclined.

regards

by economist | 19th Nov 14, 10:30am 1416346212

Oh and 11% CPI inflation (real inflation is more than that due to how they calculate it) is not the massive deflation you have been predicting steven....

by steven | 19th Nov 14, 11:42am 1416350558

and you are using non-normal 11%/6years descriptions to justify your position. The normal and accepted method is per annum. Plus teh trend is at present that of dis-inflation.

"calculate it" yeah sure same old same old...." its more I tell you!, more!!!"

Yes, I still look at the predictions of deflation and see them as the most probable outcome (from this mess). Really as long as the CB's continue to undertake actions that block deflation, yeah sure it hasnt occured yet.

regards

by Snodgrass Thro… | 23rd Nov 14, 6:51am 1416678702

Inflation/deflation/dis-inflation. It's actually a moveable feast.

At any one time there are an ever-changing bunch of inflationary forces being counteracted on by an ever changing bunch of deflationary forces. In NZ for the last few years the winner is............inflation (by a nose, it was a photo finish).

Peoples perception tends to frame what they call reality. They'll swear there is rampant inflation because the price of collywobbles has gone up 10c.

by steven | 23rd Nov 14, 7:32am 1416681173

Indeed, but which is the most dangerous?

and how asymetrical is the difference?

Also can you take inflation in isolation?

By this I mean, in terms of "by a nose" if you consider that usually (within reason, all else being equal etc) a small % of inflation say 3~4% usually means lower un-employment ie under say 5% then having low inflation as we do now has meant 1~2% more of workers are un-employed and calling on the public purse as a result and we pay more tax than need be.

So 2% inflation and 6% un-employment (and higher tax) V 3% inflation and 5% un-employment (and lower tax) which is worse? If they balance out the same which is the better outcome to choose? personally I have to go for the latter.

Im sure some excel savvy person can graph this as proof or not.

regards