Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030519b.jpg" width="353">
Data released last Friday show that GDP in Japan rose 0.01% in real terms in the first quarter of 2003 while in nominal terms it declined by 0.62%. The deflator, which has declined in every year since 1995 with the exception of 1997 declined by 3.85% in the first quarter. The attached chart shows the widening gap between the real and nominal GDP in Japan. 
Japan is in the throes of a vicious cycle of deflation where bad debts grow faster than the economic system&#146;s ability to deal with them. Over the past weekend the government announced that it would inject 2 trillion yen ($17 billion) into Resona, the country&#146;s fifth largest bank, to return it to solvency. Such measures may provide some short-term relief, but eventually more fundamental changes will have to be undertaken if the Japanese economy is to emerge from its deflationary cycle.

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<th scope="col" class="firstcol"></th>
<th scope="col">Q1 2003</th>
<th scope="col">Q4 2002</th>
<th scope="col">Q/Q</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
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<tr class="odd">
<td class="firstcol">Nominal GDP (Trillion Yen)</td>
<td>496.1</td>
<td>499.3</td>
<td>-0.62</td>
<td>-0.92</td>
<td>-1.16</td>
<td>-0.78</td>
<td>0.14</td>
</tr>
<tr>
<td class="firstcol">Real GDP (1995 Trillion Yen)</td>
<td>543.6</td>
<td>543.5</td>
<td>0.01</td>
<td>2.50</td>
<td>0.46</td>
<td>0.82</td>
<td>2.13</td>
</tr>
<tr class="odd">
<td class="firstcol">GDP Deflator</td>
<td>89.9</td>
<td>93.5</td>
<td>-3.85</td>
<td>-3.54</td>
<td>-1.69</td>
<td>-1.42</td>
<td>-1.94</td>
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Data released last Friday show that GDP in Japan rose 0.01% in real terms in the first quarter of 2003 while in nominal terms it declined by 0.62%. The deflator, which has declined in every year since 1995 with the exception of 1997 [...]

Deflation Intensifies in Japan

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Kathleen Stephansen, CBE

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The Producer Price Index for final demand rose 0.2% (3.3% y/y) in December, following an increase of 0.4% (3.0% y/y) during November, according to the Bureau of Labor Statistics (BLS). The December monthly reading compared to a 0.4% rise expected in the Action Economics Forecast Survey. Producer prices excluding food, energy & trade services edged 0.1% higher (3.3% y/y) following a similar monthly rise (3.5% y/y) in November. The PPI excluding food & energy was unchanged (3.5% y/y) in December after rising 0.2% (3.5% y/y) in November. The BLS reported that on an unadjusted basis, prices for final demand increased 3.3% in 2024 after moving up 1.1% in 2023, while prices for final demand excluding food, energy & trade services rose 3.3% in 2024 following a 2.7% advance in 2023.

Final demand food prices eased 0.1% (4.7% y/y) in December, following a rise of 2.9% (4.9% y/y) in November, revised from a rise of 3.1% (4.9% y/y). Prices for fresh and dry vegetables declined by 14.7% (+21.3% y/y), while egg prices rose 0.5% (127.9% y/y) after a surge of 55.6% over the month in November.

Energy prices increased 3.5% (-2.0% y/y) during December, after holding steady (-6.1% y/y) in November, revised from a rise of 0.2% (-6.2% y/y). Gasoline costs rose 9.7% (-2.5% y/y) while home heating oil prices rose 4.0% (-12.6% y/y). Electric power prices rose 1.0% (1.8% y/y) and natural gas costs gained 0.7% (2.2% y/y). Diesel fuel dropped 1.3% (-13.9% y/y).

Final demand goods prices excluding food & energy were unchanged over the month (2.1% y/y) during December, following a rise of 0.2% (2.2% y/y) in November. Core finished consumer goods prices increased 0.1% (2.4% y/y) after a rise of 0.3% (2.3% y/y) in November. The increase in core nondurable goods prices rose 0.1% (2.9% y/y) last month after a rise of 0.4% (2.9% y/y) in November. Durable consumer goods prices rose 0.2% (1.6% y/y) in December following a rise of 0.1% (1.3% y/y) in November. Capital equipment prices rose 0.2% (2.8% y/y) last month following a similar monthly rise (2.7% y/y) in November. Core government-purchased goods prices edged 0.1% higher (2.1% y/y) in December, after similar monthly and year-on-year rises in November.

Final demand services prices were unchanged (4.0% y/y) in December after rising 0.3% (3.9% y/y) in November. Trade services prices eased 0.1% (+4.4% y/y) last month following a rise of 0.7% (3.2% y/y). Trade of finished goods prices were unchanged (3.8% y/y) in December, after rising 0.6% (2.8% y/y) in November. Prices for final demand transportation and warehousing services rose 2.2% (2.1% y/y) last month, after falling 0.6% (-0.3% y/y) in November. Services prices less these costs fell 0.2% (+4.1% y/y) last month, after a rise of 0.2% (4.7% y/y) in November.

Construction costs rose 0.2% (1.7% y/y) in December, after holding steady (+1.6% y/y) during November.

Prices for intermediate demand of processed goods rose 0.3% (0.2% y/y) in December after holding steady (-0.6% y/y) in November. Processed energy goods prices rose 1.6% last month after easing 1.2% in November, while food prices rose 0.4% following a 0.8% advance in November.

The PPI data are published by the Bureau of Labor Statistics and can be found in Haver’s **USECON** database. Further detail is contained in **PPI** and **PPIR**. The expectations figures are available in the **AS1REPNA** database.

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- Overall index rise softer than expected.
- Advance in core goods prices is steady.
- Advance in services price is steady.

U.S. PPI and Core PPI Gains Ease in December

Robert Brusca

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The OECD seven-country LEI rose in December and is gaining at an annual rate of 1.1% over three months, up marginally from a pace of 0.9% over six months and doubling its growth rate over 12 months. Still, all of these are modest numbers. Japan’s LEI was flat in December and shows LEI declines over three months, six months and 12-months. The U.S. shows a gain of 0.2% in December with a 1.8% annual rate rise over three months, a 1.3% pace over six months and the same 0.5% gain year-over-year as for the OECD7. The index levels show an OECD7 queue standing in its 66.8 percentile, the U.S. a tad stronger at its 68.2 percentile and Japan much weaker and below tis median pace at a 36-percentile standing.

The OECD likes to judge these indicators over six months. So, I construct six-month averages, and we see the same 0.4% U.S. and OECD7 gains on this average for its change month-to-month in December and November for both. Japan turns up flat in December on this metric and shows declines over three months and 12 months. In contrast, China shows declines on this averaged gauge in December and in November but shows growing momentum from 12-months to 6-months to 3-months. The 6-month growth rate show strength in the rankings for the U.S., China, and the OECD7. But Japan also sputters in terms of growth rates on 6-month changes with a 36-percentile standing.

The amplitude adjusted metrics show only France persistently with a reading below 100 - but Japan walks the line. The ratio to six months ago shows only Japan and Germany weakening. The queue standings show only Japan and Germany, with readings below their respective medians (values below 50%).

The OECD data are not very reassuring. While conditions show basic advancing trends, they are advancing slowly with little evidence of strength. The U.S. has the strongest standing on OECD index levels and growth rates, and they are largely in the 68th and 81st percentile ranges. Germany and Japan sport 36-percentile standings for their LEI index levels on amplitude adjusted readings. These are very weak reading for two important economies.

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OECD LEIS Creep Ahead

Tian Yong Woon

In our first economic letter of the year, we focus on China. Despite positive economic surprises in recent months (Chart 1) and growth now on track to meet the “around 5%” target, China’s recovery remains uneven and subject to downside risk. In response, China’s authorities have rolled out more fiscal and monetary easing measures (Chart 2), broadening both their scale and their scope. However, some observers continue to question whether these measures will be effective, particularly in addressing deeper structural issues.

Amid expectations of low interest rates and concerns about a deflationary spiral, investors have bought more Chinese bonds, driving yields to record lows (Chart 3). The continued decline in bond yields prompted the authorities to intervene on Friday and halt further bond purchases. Looking ahead, China faces several challenges, with US trade policy, in particular, a key concern (Chart 4).

Ahead of potential US trade actions, producers and importers have taken precautionary steps, boosting supplies, and thereby driving China’s export growth in recent months (Chart 5). Nonetheless, export prices have continued to decline, and the yuan has weakened further. Against this backdrop there will be much interest in this week’s upcoming data releases, including the highly anticipated Q4 GDP report (Chart 6).

**Recent developments**
Although there have been some positive developments, lingering macroeconomic challenges persist. On the one hand, the extent of economic surprises in China, as shown in Chart 1, remains largely positive, with a flurry of positive surprises late last year. On the other hand, concerns in sectors like the property market continue to weigh on the economy. Moreover, the pace of China’s economic recovery remains uneven across sectors, as reflected in the latest PMI readings. The manufacturing sector shows only mild expansions, while the non-manufacturing sector continues to grow at a faster pace. Nonetheless, President Xi has recently stated that China is on track to meet its growth target of "around 5%" for 2024. China’s real GDP growth has certainly stayed close to the 5% target, narrowly missing it with a 4.8% year-over-year growth in Q3.

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China’s authorities have pledged continued support for the economy. On the fiscal front, leaders have committed to increasing the budget deficit to 4% of GDP while maintaining a growth target of "around 5%", thereby providing more room for expenditure. Additionally, authorities have reportedly agreed to significantly increase special bond issuance to 3 trillion yuan ($409 billion) in 2025, setting a new annual record. To further stimulate consumption, the government announced an expansion of the home appliance trade-in subsidy program, increasing the eligible items from eight to twelve. Additionally, millions of government workers received pay raises, boosting their disposable income and potentially driving greater consumption. On the monetary side, the People’s Bank of China (PBoC) has reaffirmed its "moderately loose" policy stance, promising to further reduce the reserve requirement ratio and interest rates, though the timing of these moves remains unclear. While these measures signal a clear intent to support the economy, some observers argue that they may not be sufficient to spark a robust recovery. Others, however, believe that the cautious approach is appropriate given the current circumstances.

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The recent rally in China’s bond markets appears to be fuelled by expectations of continued monetary easing and concerns over a potential deflationary spiral, among other factors. Investors have stepped up their purchases of Chinese bonds, driving yields to record lows, with the 10-year government bond yield at one point falling below 1.6%, as shown in Chart 3. This stands in contrast to the US, where government bond yields have risen due to a market reassessment of Fed rate cuts and expectations surrounding President-elect Trump’s policies. China's December CPI reading, which dropped to a nine-month low of just 0.1% year-on-year, has further heightened concerns of deflation. These factors have reignited fears of a potential "Japanification" of China, drawing parallels to the 1990s when Japan experienced leverage, persistently low inflation (and often deflation) as well as weak consumption.

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**Looming headwinds, anticipatory moves**
Adding to China’s challenges are potential actions from incoming US President Trump, who has maintained a hawkish stance on China as America’s economic rival. At the core of Trump’s position is his dissatisfaction with China’s large and persistent current account surplus with the US, primarily driven by trade (Chart 4), and concerns about its impact on the US economy. Additional worries focus on China’s overcapacity, which has supported export growth, and the extensive use of state subsidies that were perceived to have harmed US industries. As a result, Trump’s proposed solution—tariffs as high as 60% on Chinese exports to the US—could undermine one of China’s few remaining growth drivers, namely trade.

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Producers and importers of Chinese goods have taken proactive steps in response to expected headwinds, with exports growing by double digits in October and December ahead of Trump’s return to office. Despite this, export prices have continued to decline (Chart 5), a trend some attribute to ongoing overcapacity in China. In response to potential US tariff actions, producers have also taken steps such as reorganizing supply chains and outsourcing from other economies. On the currency side, the yuan, along with many other Asian currencies, has depreciated significantly against the US dollar, which has made Chinese exports cheaper. However, whether a weaker yuan can fully offset the impact of looming US tariffs on China remains uncertain.

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**Upcoming data**
Looking ahead to the coming week, China’s data releases will be pivotal for investors in shaping their views on the economy. Along with its usual monthly reports, including retail sales, industrial production, unemployment, and house prices, China will release the highly anticipated Q4 GDP data (Chart 6), providing greater clarity on the economy's performance in 2024. Analysts will be keen to assess whether the recent easing measures are beginning to yield positive effects. Additionally, attention will likely turn to domestic travel and spending patterns during the upcoming Chinese New Year holidays later in the month, as these may offer insights into consumer sentiment and spending behaviour in period ahead.

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Asia

Economic Letter From Asia: On China

Peter D'Antonio

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December payroll employment gains of 256,000 far exceeded expectations of a 150,000 rise, pointing to a resilient economy and suggesting that the Fed may be on hold for longer than previously anticipated. Uncertainty about the course of Fed policy has heightened focus on the employment report in recent months, as markets have tried to gauge the pace of policy easing. Today’s figures gave the first clean reading on the labor market in several months after distortions from weather and strikes.

The reading from the household survey was very strong as well. The unemployment rate edged down to 4.1% in December from 4.2% in November. Markets had expected an unchanged reading of 4.2%. The December unemployment rate decline reflected a solid rise in the labor force of 243,000, a jump in employment of 478,000, and a decline in unemployment of 235,000.

The household survey revealed that the number of job leavers jumped for the second straight month, suggesting increased confidence in the labor market. Also, the number of people working part-time for economic reasons fell for the fourth consecutive month.

Payrolls have been extremely volatile in recent months. Three of the past five readings have exceeded 200,000, while the other two figures fell short of 100,000. Through this volatility, the underlying trend over six-month spans hovered near 140,000 by November. The December figure pushed the six-month average payroll gain up to 165,000.

The December gain in payrolls was widespread across services. Goods-producing payrolls declined by 8,000, reflecting continued weakness in manufacturing. But private services added 231,000, which was the biggest gain since May 2023. Within services, healthcare and social assistance continued to post the biggest gain at 70,000, with leisure and hospitality adding 43,000. Government employment remained solid as well, rising 33,000.

While the payroll gains were undoubtedly strong, the average workweek and average hourly earnings did not signal renewed strength. The workweek remained at a lackluster 34.3 hours and hourly earnings increased by 0.3%. That lowered the year-to-year rise to 3.9%, probably reflecting the ongoing normalization of job openings.

The strength in this report suggests that Fed policy will remain tighter for longer. The bond market already has responded, with the 10-year Treasury yield rising 6bps to 4.74%, which is the highest since October 2023. Futures prices also suggest that markets are pushing out the timing of expected rate cuts. It will be important to monitor future employment reports to see if the December strength continues.

The labor market data are contained in Haver's **USECON** database. Detailed figures are in the **EMPL** and **LABOR** databases. The expectations figures are in the **AS1REPNA** database.

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- Widespread job gains in December.
- Jobless rate edges down.
- Earnings pressures ease.


Deflation Intensifies in Japan

Summary

Louise Curley

More Economy in Brief

U.S. PPI and Core PPI Gains Ease in December

OECD LEIS Creep Ahead

Economic Letter From Asia: On China

Strong Payroll Report Signals Economic Resilience

	Q1 2003	Q4 2002	Q/Q	Y/Y	2002	2001	2000
Nominal GDP (Trillion Yen)	496.1	499.3	-0.62	-0.92	-1.16	-0.78	0.14
Real GDP (1995 Trillion Yen)	543.6	543.5	0.01	2.50	0.46	0.82	2.13
GDP Deflator	89.9	93.5	-3.85	-3.54	-1.69	-1.42	-1.94