Let me say it again – it’s domestic demand (in Japan), stupid

The Nikkei had a 20% set-back, but is now surely making a major comeback. This morning Nikkei is up 3.5%. The rally continues supported by very strong macroeconomic numbers and you have to be very suborn to continue to claim that monetary easing is not working in Japan (I wonder what Richard Koo will be saying…)

I think the most notable thing about the Japanese economy right now is that it is domestic demand rather than exports, which is really the driver of growth. This is of course what I have argued all along (see my earlier comments here, here, here and here).

But let me instead quote my good colleague and Danske Bank’s Asia analyst Flemming Nielsen:

“Data released overnight shows that the Japanese economy continues to power ahead and now appears to be moving out of deflation. While Japan’s export so far is urprisingly resilient, it would be wrong to accuse Japan of just stealing growth from the rest of the world through a weaker yen. On the contrary the Japanese economy currently appears to be gaining much of its strength from strong domestic demand.

Despite all the focus on the negative impact from a weaker yen, Japan at the moment appears to be a stabilizing force for the global economy. The data released overnight indicates GDP growth above 3.5% q/q AR in Q2 on the back of 4.1% q/q growth in Q1.

…Japan’s industrial production continued to expand solidly in May, where industrial production seasonal adjusted increased 2.0% m/m. This was much stronger than expected and the fourth month in a row with an increase. The strength in manufacturing activity was also evident in the Markit/JMMA manufacturing PMI for June, where it improved to 52.3 from 51.5 in May …The export orders component did decrease slightly from 52.1 from 52.6 but overall was surprisingly resilient. Total new orders continued to improve to 54.7 in June from 53.7 in May underscoring the current importance of strong domestic demand for the recovery in Japan.

…Deflation continued to ease in May where CPI excl. fresh food (the inflation measure BoJ targets) increased 0.0% y/y after declining 0.4% y/y in April. Core CPI excl. food & energy declined 0.3% y/y after declining 0.6% y/y in April. Based on preliminary CPI date for June for the Tokyo area we estimate that nationwide CPI excl. fresh food will stay at 0.0% y/y in June but CPI should start to show a positive year-on-year increase during Q3.

I find it very hard to be pessimistic about the Japanese story – monetary policy is working exactly the way Market Monetarists have argued it would work. The Bank of Japan is ending 15 years of deflation and in the process the Japanese economy is taking off. Imagine that the ECB would dare do something similar?

PS Yes, Kuroda still needs to work on communication and yes Japan badly needs structural reforms, but that is not changing that monetary policy is working.

Leave a comment


  1. Would like to know who you explain falling Korean domestic demand:
    June 28, 2013 -0.2%
    May 31, 2013 -0.5%
    Apr. 30, 2013 1.4%
    Mar. 29, 2013 -0.1%
    Feb. 28, 2013 -2.0%
    Jan. 31, 2013 -1.1%

  2. And why Japanese exports in Q1 grew by 3.8% and imports only by 1% http://snbchf.com/2013/05/swiss-gdp-0-6-qoq-1-1-yoy/swiss-gdp-vs-australia-2013-d/
    (apart from Brent) Might Japanese prefer to buy the by now cheaper domestic goods?

  3. Japanese consumer spending was strong in 2010/2011 until the earthquake. And also in 2012 before Abe.

  4. George,

    the drop is Korea’s domestic demand can perhaps be explained by the excessive dependence of its economy on exports. Korean gross exports are about 70% of GDP, compared to less than 15% for Japan, and about 10% for the US.

    If the Korean authorities choose to develop a more balanced economy, they can adopt structural, fiscal, and monetary measures to boost domestic demand. If not, they will remain highly sensitive on other nations’ private consumption, stiffening competition in third-country markets, and also exchange rates.

    But that is a matter of the economic model choses for the long haul. To make a point: by 1949, Japan had adopted comprehensive national health care, social, and pension programs for all citizens.

    Yes, massive capital investment to rebuild the destroyed infrastructure and exports helped kick-start growth after the war, but it was this early long-term structural policy decision that allowed Japan to develop a very big and wealthy middle-class to serve as a domestic consumer base.

    Best regards,
    Mikio Kumada

  5. Apologies for the typo: It should be:

    But that is a matter of the economic model *one chooses* for the long haul.

  6. Lars,
    It doesn’t seem that nations are used to thinking in terms of domestic demand, and as far as I can tell, haven’t done so since the Great Depression. And even that was really demand side focus, rather than any attention to what was happening with supply side except what government directly meddled in. Even prior to the Great Recession, it was all about the international companies and the fact that they “suddenly” seemed more important than national governments. Of course once the crisis hit (which had such important ramifications at local levels) all the dialogue seemed to center around what national governments could or could not do on their own, rather than what their citizens could do. The fact that an international business environment seemed stronger than government till recently, of course, all but forgotten. But no one has really dealt with the underlying issues that start at local levels. Time for some local summits, perhaps!

  7. Benjamin Cole

     /  June 30, 2013

    Yes. Print more money. South Korean should print more money too.

    Somehow, through some sort of central banker global network, it became “good policy” for central banks have tight money, even to the point of suffocating economies.

    Aside from that, Japan’s monetary authorities have to do what is right for Japan, not S. Korea. If Japan propers with a growth-oriented monetary policy, should they pull in their horns to not hurt Korea?

    I sure hope the Fed does what is right for me (as a US citizen), not some idealized version of the global monetary system.


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