It is 15 years since Japan’s bubble burst and several nascent recoveries have fizzled out along the way and the economy has repeatedly dipped back onto recession. This time, however, things may at last be different. Growth surprises have, unusually for Japan, been to the upside and the GDP report for Q4 2003 at an annualised rate of 7% was really encouraging and substantially stronger than most observers had been expecting. In fact it was the fastest growth spurt for nearly 14 years.
Nothing is ever straight forward, of course, and particularly not in Japan. That GDP announcement saw JGB’s edge up to their highest level since August 2003, not what the textbooks say interest rates should do in a strong economic environment. The bond market was reacting to the drop in the GDP deflator rather than the growth itself, say Barclays Global Research. However head of global interest rates strategy Tim Bond suggests that the market is wrong to believe that deflation is still a problem for Japan.
He argues that there are several factors that tend to exaggerate deflators, most of which can be explained away. He further argues that the composition of growth is reassuring on the issue of sustainability, so much so that the he and his team have brought forward the expected timing of a closure of Japan’s famously long-lived output gap.
Long time Japanese bear, Graham Turner of GFC Economics agrees that his bearish stance is now the minority view. “My sense of conviction that Japan was/is still in the grip of deflation and unable to inflate itself out of trouble is not as strong as it was”, he admits, “and I do now have doubts.”
Although he’s isolated in his view and now the bond market has indeed suffered a vicious sell-off, Turner is not ready to throw in the towel. “It’s been tough being so bearish for so long in Japan and it would be nice to be able to tell everyone that I have finally stopped being bearish, but I am not sure now is the time. For me, property prices have been key to revealing the true state of recovery or otherwise – they were certainly reliable at pointing to the start of the downturn in the late 1980s and 1990s when the bubble started to deflate. The market has convinced itself that house prices are turning up but the evidence says otherwise. If we look at the NLA (National Land Agency) Survey it shows that land prices are going down faster than ever.”
He goes on to point out that although the city banks seem to be doing OK dealing with their huge portfolios of non performing loans (NPL) the regional banks have twice as many and are still in severe straits. Property prices are the key problem for Japan, says Turner, and as far as he can see there is no evidence that they are stabilising. So he is opting to stay in the shrinking bear camp (about the economy) and bull camp for bonds. He has his tin hat at the ready.