Thursday, August 05, 2004

Economy: Japanese Hiccup,

The FT reports that watchers of the Japenese economy are unhappy about its failure to grow wages.

Falling wages fuel concerns over Japan recovery
By David Pilling in Tokyo
Published: August 2 2004 12:16 | Last updated: August 2 2004 12:16

The ability of Japanese consumers to sustain the country’s two-year-old recovery came under renewed scrutiny on Monday with the release of data showing that wages fell unexpectedly in June by 2.4 per cent.


Wages, including summer bonuses, were in the second straight month of decline. It came in spite of the fact that overtime increased from a year earlier for the 26th straight month and that some manufacturers raised bonuses.

However, bonuses in the service sector fell sharply, bringing overall extra payments down 5.6 per cent. Base wages were down an unexpectedly high 0.5 per cent against the previous June.

Paul Sheard, chief economist at Lehman Brothers in Tokyo, said the weak wage numbers showed that corporate Japan was still very focused on cost containment. Companies were therefore unlikely to pass on gains in the form of wages, short-circuiting the normal mechanism by which higher profits feed into consumer spending power.

“I still don’t buy the story that the consumer is picking up the reins of this recovery in a big way,” said Mr Sheard. He pointed to the fact that companies were sharply increasing the proportion of casual and part-time labour, which helped explain why falling unemployment had been slow to filter through into firmer wages.

The impact on wages, particularly bonuses, is clear. Summer bonuses for full-time employers averaged about Y250,000 ($2,250), while those for part-time staff were a paltry Y5,262.

“Part-time work is up about 5 per cent year-on-year, with permanent employment down about 1 per cent,” said Mr Sheard. “This is a relentless trend.”

Sceptics say Japanese consumers, particularly if their jobs are insecure, cannot keep dipping into savings, limiting their ability to fuel domestic-led economic growth. The main factors behind the recovery so far have been exports and industrial investment, much of it in export-led industries.

Jeffrey Young, economist at Nikko Citigroup in Tokyo, said: “I take [falling wages] very seriously. It confirms that even a long string of favourable cyclical conditions and a sustained profit increase is not enough to sustain higher wages. It is striking that well into the third year of recovery, wages are not only not rising but falling significantly.”

Doubts about consumer sentiment were supported with the recent release of figures showing household spending fell 1.3 per cent in June, though this came after two months of strong increase.

Peter Morgan, chief economist at HSBC in Tokyo, said he did not believe consumption was strong enough to sustain Japanese growth in the absence of a favourable international environment.

“We have seen an uptick in consumer sentiment but the question is how well supported that will be going forward with these weak wages,” Mr Morgan said. “The economy remains vulnerable to external shocks and I don’t have the same faith in a sustainable domestic-led recovery that some other people say they have.”

Separately, a survey from the national tax agency showed that land prices across Japan fell 5 per cent last year, the 12th straight year of decline, though in some parts of central Tokyo prices rose.

What kills me is that economic watchers in America see pretty much the same story, but they somehow spin it into a Pollyanna story. It's shameful. Or perhaps we should take into account that they're not being objective. Just as in stock-analysis, perhaps economic analysis might benefit from independent analysis. (Slate)
Over the seven-year period, the buy recommendations issued by independent firms outperformed the recommendations of investment banks by about 8 percentage points annually. (For example, if investment bank recommendations returned 5 percent more than the general market, independent recommendations returned 13 percent more.)

Considering investment banks' advantages in resources and access to management, the difference is impressive. But the performance of the independent firms since the bust has been even more impressive. Between March 2000 and June 2003, investment bank buy recommendations essentially tracked the broader markets, but independent buy recommendations outperformed the market by about 17 percentage points.

Why would independents do so much better? It turns out that the conflicts that Spitzer set out to eliminate have a lot to do with the underperformance. The researchers did a set of additional tests, and found that the recommendations of investment banking firms made on companies just after equity offerings—initial public offerings or secondary stock offerings—underperformed recommendations of independent firms by 22 percentage points annually. Says Trueman: "That's consistent with a reluctance on the part of analysts to downgrade stocks that have had investment banking relationships."

In theory, the settlement—by insulating analysts from the pressure exerted by their investment banking colleagues—should have fixed that. But, Trueman notes, analysts at the 10 investment banking firms that settled with Spitzer weren't the only ones who placed unwarranted buy ratings on companies that had recently sold stock; all investment banks that conducted both underwriting and research underperformed. In other words, just being in the same company as investment bankers distorted the analysts' views, and made them excessively optimistic about companies doing stock offerings.

So when your brokerage firm tells you that its analysts' advice is trustworthy because they're insulated from pressure, you should smile, nod, and then ask for the independent research.[emphasis added]

As I've mentioned before, I don't think we have a conspiracy here unless by conspiracy you mean a conspiracy of wishful thinking. Combine that with poor standards (Anyone remember the belief in hell improves GDP growth paper anyone?) and poor quality control, and the Federal Reserve banking system becomes another victim of groupthink. These guys are in charge of the economy. They must be doing it right because things aren't bad yet, right? It was that exact sort of short-sighted refusal to means-test aid and fiscal recommendations that led the IMF to run economy after economy into the ground.

It got so bad the poor nations of the world started accusing the IMF of attempting to keep them poor. A more prosaic and sad story was at work. In the grip and blinded by economic orthodoxy and ideology, the IMF issued recommendations and conditions for extending credit to nations that led to some of the most spectactular meltdowns and bankrupcties of nations in modern history. All engineered by Ph.D. economists and finance bankers and the like.

One of the clearest ways you can spot this is the discrepency between how they will treat two pratically identical situations. In Japan, wages are falling. This is considered a major warning sign that the economic expansion is not sustainable. In the United States, we've got stagnant or falling wages and stymied job growth. This is hailed as a temporary problem in an inevitable economic recovery story. Does anyone smell something that stinks to high heaven?

The oldman does. In the case of the stock-pickers on Wall Street they became so notorious that insiders came to consider them contrarian indicators. Every time I saw Abby Joseph Cohen came out to boost for stocks, I marked off another check on my personal bubble-o-meter. It partly the publication of the book "Dow 36,000" that lead me to conclude that the market had finally topped and to sell. Just in time. In about six months the market had deflated considerably from my initial sale.

Now the talk of economists is how the oil prices will come down, however to the oldman's eyes $40+ per barrel seems to be becoming at least an intermediate term trading regularity. Hey, the oldman just believes his eyes ya know? I'm sure the economists have good reasons to explain why it really isn't $40+ per barrel or how this can't be impacting our economy significantly or how it really shouldn't be counted into inflation measures. Whatever.

They're like those neocon idiots who happen to think propaganda will stop bullets. As Iraq is proving, but all too Americans are still in the grip of delusions about, bullets and good old fashioned military ground truth cannot in fact be wished away by propaganda.

Our economy is on its last legs, and we're on the verge of a shocking generationally unprecedented rollback or outright defeat in Iraq. Those are the hard bloody facts. However most Americans are almost completely unaware of both, including apparently Rumsfeld and Greenspan. Shocking you say? Nah. They were always that incompetent, it's just that while things were going good nobody noticed. It's when times are tough that competence pays.

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