Wednesday, June 19, 2013

Waiting for trickle down

Another day, another round of statistics to parse in an attempt to determine whether or not Abenomics is working. The latest are Japan's trade figures, which found that Japanese exports in May yielded 10% more than in May 2012, although the volume of exports fell for the twelfth straight month. The spike in export earnings, however, was matched by a $10 billion trade deficit for May.

What does this all mean for the average Japanese household? Unfortunately, for now, it seems not much.

As Jonathan Soble concludes in the Financial Times:
The prime minister 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 more yen.
 Thus far, Japanese corporations are still hoarding their profits, holding record amounts of liquid assets according to a Bloomberg report by Toru Fujioka and Mio Coxon. Hence the periodic exhortations by Abe and other government officials encouraging companies to invest more and pay more.

The flip side of higher-than-expected export earnings is higher costs for domestic producers and households dependent upon imported energy, raw materials, and foodstuffs, as Bloomberg's Jacob Adelman and Ichiro Suzuki reported recently. The Finance Ministry's trade report for May (jp) shows just what Japanese are paying more to import. May's 10% increase in the value of exports was matched by a 10% increase in the value of imports. The report breaks down both figures by the contribution of different categories of product to the total figure. In May, Japanese importers paid:

  • 12.3% more for foodstuffs than in May 2012 (including 37.2% more for grains).
  • 20% more for raw materials including timber (59% more), non-ferrous metal ores, iron ore, and soybeans (38.7%).
  • 2.7% more for fuels, although that may reflect the fact that imports of coal, liquified natural gas, and liquefied petroleum all dropped by significant margins, and despite importing 9.8% less LNG than in May 2012, Japan paid 8.2% more for what it imported. Japan also spent 6.4% more on crude oil imports even though it only imported .7% more.
  • 8.7% more for chemical products.
  • 6.7% more for intermediary goods like steel and other metal products.
  • 10.7% more for general machinery.
  • 23.7% more for electronics and electrical equipment, including 35.6% more for semiconductors and 58.6% more for communications devices.
  • 14.3% more for transportation equipment.
  • 12.2% more for miscellaneous products, including scientific instruments, clothes, furniture, and the like.
Of the 10% increase in the cost of imports, MOF's report suggests that at least 40% comes from costlier food, raw materials, and intermediate goods like steel, and fuel. If we assume that "communications devices" refers mostly to mobile phones and other personal electronics, consumer goods may account for 25% of the increase in import costs, with the remaining third going largely to capital equipment. Although we won't know for sure until we see the May industrial production data, it does seem that Japanese producers are paying more for imported inputs but not producing or exporting more goods. And if imported inputs cost more, it seems unlikely that Japanese producers will at the same time pay their workers more. In particular, if small producers find their production costs rise without a corresponding increase in profits, it is hard to see how their workers and therefore Japan's consumers will benefit from a weaker yen.

Because, after all, the firms that employ the majority of Japanese workers earn less from exports  than the large corporations. According to the government's 2012 economic census (jp) roughly 50% of workers are employed by companies employing fewer than thirty people, and 70% of workers are employed by companies employing fewer than 100 people. Only 15% of the workforce are employed by the large corporations that benefit most from the weaker yen. According to data provided (jp) by the Small- and Medium-Sized Enterprises Agency at the Ministry of Economy, Trade, and Industry (METI), in 2012, those large corporations earned just shy of 40% of export earnings, compared to the 15% earned by small- and medium-sized enterprises (SMEs) employing fewer than 300 workers. The remainder and largest share went to corporations composed of small and large firms.

Not only are Japanese workers unlikely to reap the benefits of greater earnings from exports, but they are in all likelihood paying more for food, since, after all, Japan only produces around 40% of its food supply, and is almost completely dependent on imports for wheat and beans (hence the sharp increase in outlays for grain and soybean imports). Perhaps the Japanese diet will change over time to include more foods in which Japan is relatively self-sufficient — especially rice — but in the meantime, Japan's low rate of self-sufficiency in food production will not just contribute to trade deficits but, more importantly, will pinch household finances.

In short, the latest trade data confirms what the latest public opinion data suggests, namely that most Japanese have not personally experienced the Abe recovery. Until the big companies invest more, employ more, and pay more, Abenomics cannot be said to be working for the average Japanese household, whatever the headline figures say.

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