Download Why Has Japan Been Hit So Hard by the Global Recession?

IMF STAFF POSITION NOTE
March 18, 2009
SPN/09/05
Why Has Japan Been Hit So Hard
by the Global Recession?
Martin Sommer
I N T E R N A T I O N A L
M O N E T A R Y
F U N D
INTERNATIONAL MONETARY FUND
Why Has Japan Been Hit So Hard by the Global Recession?1
Prepared by the Asia and Pacific Department
(Martin Sommer)
March 18, 2009
CONTENTS
PAGE
Executive Summary...................................................................................................................2
I.
Interpretation of the Q4 Outturn.......................................................................................2
II.
Implications of Inventory Adjustment..............................................................................4
III.
Conclusion........................................................................................................................6
1
The views expressed herein are those of the author and should not be attributed to the IMF, its Executive
Board, or its management.
2
EXECUTIVE SUMMARY
The Japanese economy has been hit hard by the slump in global demand for advanced
manufacturing products such as cars, information technology, and machinery, which
account for a larger share of production than in other G-7 economies. Worsening domestic
financial conditions deepened the current recession by reducing domestic demand,
especially business investment. The short-term outlook is further clouded by the needed
adjustment to inventories, which have accumulated well above normal levels in both Japan
and its export markets.
I. INTERPRETATION OF THE Q4 OUTTURN
Japan’s production and exports have collapsed in recent months. Real GDP fell by
12.1 percent SAAR in Q4/2008, with net exports contributing about 10 percentage points to
this decline. Japan’s performance was the worst among the G-7 countries, although the
output drop was even deeper in the newly industrialized economies (NIEs) such as Korea
and Taiwan Province of China (Figure 1A). Export and industrial production data for
January indicate further declines.
Most of the drop in Japan’s exports was caused by a sharp retrenchment in overseas demand
for motor vehicles, information technology (IT), and capital goods (Figure 1B), as firms and
consumers cut their investment and durable goods spending in response to the global credit
crunch2 and extraordinary uncertainties about the outlook. In particular, data on motor
vehicle registrations point to a collapse of car sales in a number of economies (Figure 1C).
As a result, Japan’s car exports fell by 65 percent since September 2008, with shipments to
the United States plunging almost
75 percent (Figure 1D).
0
2.5
5
7.5
10
12.5
15
17.5
20
0
GDP Growth Q4/2008 (SAAR)
The comparison of Q4 GDP
outturns among selected countries
suggests that economies with a
greater share of advanced
manufacturing such as IT goods
and autos in GDP have tended to
experience sharper output
declines than their peers (see also
Figure 1E). Japan’s woes were
further exacerbated by its large
Q4 GDP Growth vs. Share of Advanced
Manufacturing in GDP
-5
-10
Spain
Australia
Canada
Netherlands
France
United Kingdom
United States
Italy
Mexico
Germany
Malaysia
Japan
-15
-20
Korea
-25
Taiwan POC
-30
Share of high and medium-high tech manufacturing value added in GDP
Sources: CEIC; Haver Analytics; OECD; and IMF staff estimates.
Note: For the definition of advanced manufacturing, see Figure 1.
2
The shock to the commercial paper and other short-term funding markets after the collapse of Lehman
Brothers may have made corporations less willing to invest, while the lower availability of consumer credit, in
particular car loans, may have discouraged some purchases.
3
Figure 1. Japan: Dissecting the Q4 Export Collapse
A. Japan’s GDP collapsed in Q4/2008 …
B. … as exports of motor vehicles, information technology, and
capital goods fell sharply.
0
Contribution to Q4 Export Decline By Product
Type
-5
-10
Motor vehicles
GDP Growth Q4/2008
-15
Capital goods
(In percent, SAAR)
Taiwan POC
Korea
Singapore
Italy
Japan
Information
technology
Hong Kong
-30
Germany
Intermediate goods
United States
-25
United
Kingdom
Other
France
-20
Source: Haver Analytics.
Source: Bank of Japan.
C. The decline in spending on motor vehicles is apparent in
many major economies …
40
160
New Motor Vehicle Registrations
(y-on-y percent change, 3 mma)
30
D. … with Japan’s car exports falling by two-thirds since
September.
140
20
120
10
100
0
80
-10
Japan Car Exports
(Units, 2007=100)
60
Japan
United States
United Kingdom
Germany
-20
-30
20
-40
2006
2007
2008
2009
Source: Haver Analytics.
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
F. … which has amplified—together with exchange rate effects—
Japan’s downturn during the current global recession.
18
14
0
Jan-07
Sources: CEIC.
E. Japan and the NIEs have a relatively large share of
advanced manufacturing in their GDP …
16
Total
United States
European Union
Asia
40
Contribution to Q4 Export Decline By Region
Share of High Tech and Medium-High Tech
Manufacturing in GDP 1/
(2002, in percent)
12
10
United States
European Union
China
NIEs
Others
8
6
4
2
Korea
Germany
Japan
France
Italy
Canada
United
States
United
Kingdom
0
Source: Bank of Japan.
Source: OECD.
1/ The classification of advanced manufacturing sectors follows the OECD methodology: the high tech sectors are identified as computers, audiovisual and communications equipment, precision instruments, aircraft, and pharmaceuticals; the medium high-tech sectors are transport
equipment, machinery, and chemicals.
4
trade exposure to emerging Asia, especially the NIEs (Figure 1F), in which growth has
slowed sharply—for all the same reasons as in Japan. In addition, the yen has appreciated by
about 30 percent in real effective terms since August (notably, the Korean won depreciated
by about 60 percent against the yen over this period). More broadly, the export component of
Japanese manufacturing exports is unusually high (and the import component is unusually
low), which makes the manufacturing value added and net exports very sensitive to global
demand shocks.3
Worsening financial conditions
also contributed to the poor Q4
GDP outturn by weakening
Japan’s domestic demand,
especially business investment.
Stricter lending standards,
together with high interest rate
spreads and significant stock
market declines, have tightened
financial conditions to levels
last seen during the banking
crisis of the 1990s.
Japan: The Financial Conditions Index
3
3
2
Loosening
2
1
1
0
0
-1
-2
-3
Total
Contribution of:
Interest rate spread
Stock prices
Real exchange rate
Lending attitudes of banks
-1
Tightening
-2
-3
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Source: IMF staff estimates.
II. IMPLICATIONS OF INVENTORY ADJUSTMENT
Production is likely to continue plunging during Q1/2009. The January data point to a further
sharp drop in industrial output (by 10 percent m-o-m) and exports (16 percent m-o-m)
bringing the total output loss to almost 30 percent since September. Another 8 percent m-o-m
decline in industrial production is expected for February, although the Ministry of Economy,
Trade, and Industry (METI) production survey envisages a roughly 3 percent production
increase in March (Figure 2A).
The ongoing inventory adjustment, however, presents a downside risk to this scenario. The
drop-off in shipments has been so severe that domestic inventories have been rising despite
drastic production cuts, especially in the IT sector (Figures 2B and 2C). While producers in
most sectors began reducing their inventory holdings in January, the inventory target may be
well below the pre-crisis levels since shipments are unlikely to recover anytime soon and
many manufacturers need to boost their cash balances as working capital finances remain
tight. Corporations are therefore likely to continue reducing inventories in the coming
3
Japan exports about 60 percent of its vehicle production, compared with 20 percent in the United States.
Moreover, the ratio of imports in total manufacturing supply (defined as gross output and imports) is only about
10 percent in Japan, compared with roughly 25 percent in the United States—see Bank of Japan’s February
Monthly Report of Recent Economic and Financial Developments.
5
Figure 2. Japan: Inventory Adjustment Poses a Downside Risk To Growth
A. The METI survey predicts another sharp IP decline in
February, followed by a small increase in March.
6
160
Japan: Industrial Production
METI
Production
Survey
(Contributions to month-on-month growth, SA)
4
B. However, inventories have been rising despite a sharp drop in
production, pushing up the inventory-shipment ratio …
2
Industrial Production and Inventories
(2005=100, sa)
140
0
120
-2
Other
-4
100
Iron and steel
-6
Inventories
Electronic parts and
devices
Machinery
-8
-10
80
Inventory-shipment ratio
Transport equipment
Industrial production
-12
60
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
(2005=100, sa)
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
(2007=100)
100
80
Imports
60
150
Vehicle sales
40
100
Wholesale inventories
Retail inventories
20
0
50
Jan-06
Jun-06
Nov-06
Apr-07
Sep-07
Feb-08
Jul-08
Dec-08
Source: CEIC.
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09
Source: Haver Analytics.
E. … as well as elsewhere in Asia poses a downside risk to
Japan’s growth.
150
140
Oct-07
United States: Vehicle Sales, Imports, and
Inventories
120
Total Manufacturing
Electronic Parts and Devices
General Machinery
Electrical Machinery
Transportation Equipment
200
Jul-07
D. The glut of unsold goods overseas …
140
Producer Inventories by Sector
250
Apr-07
Source: CEIC.
C. … with the inventory buildup being particularly strong in the
IT sector.
300
Jan-07
Mar-09
Source: Ministry of Economy, Trade and Industry.
Inventory Dynamics in Asia
(2005=100 for Japan and Korea, 2006=100 for Taiwan, sa)
130
F. During the 2001 recession, industrial production bottomed out
5 months after inventories peaked.
130
120
Inventory Adjustment During 2001 Recession
(2000=100, sa)
Inventories peaked
in June 2001
110
120
100
110
90
100
Inventories
Japan
90
Taiwan
Korea
80
70
Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09
Source: Haver Analytics.
80
70
Industrial production
Inventory-shipment
ratio
Industrial production
bottomed in November 2001
60
Jul-00
Nov-00
Source: CEIC.
Mar-01
Jul-01
Nov-01
Mar-02
Jul-02
Nov-02
6
months to bring down their inventory-shipment ratios, with negative implications for
production. From this perspective, the METI production survey results for February and
March could prove optimistic since the survey implies a relatively small production cut in the
electronics industry where the buildup of inventories has been most significant.
Inventories built up in export markets are adding to the downward pressure on production.
Indeed, export demand could continue falling for some time as overseas wholesalers and
retailers work off their own elevated inventory levels. Data on U.S. inventories of motor
vehicles available through December 2008 point to a glut of cars at both wholesale and retail
levels (Figure 2D). Indeed, the January shipments of Japanese cars to the United States
turned out to be particularly weak. Given the evidence of inventory buildups in other export
destinations (Figure 2E), the overseas inventory adjustment poses a short-term downside risk
unless final demand recovers quickly.
III. CONCLUSION
When will the production and inventory adjustment be over? During the 2001 recession,
industrial production started recovering about 5 months after the peak of the inventory cycle
(Figure 2F). By analogy, one could expect a bottom in industrial production around
May 2009. However, since the global environment is expected to remain weak4 and the
Japanese economy faces headwinds from tight domestic financial conditions, the production
adjustment could take longer during this recession.
4
See the January Update of World Economic Outlook.