Notes from a Private Briefing with the Bank of Japan

By Marc Chandler

The Bank of Japan held a private briefing with a small group of analysts from leading financial institutions in their NY rep office. The Director-General of the Research and Statistics Department led the presentation.

Most of the discussion was a summary of what has happened. There was little new or fresh here. More interesting was some forward looking observations which may be important for international investors.

First, Japanese auto makers are expected to return to pre-crisis output levels sooner than initially expected. In April, it was hoped that production would be restored by the end of the year. Now the BOJ expects it to occur sometime in the July-Sept period.

Second, the cost of reconstruction will be financed through a still undetermined mix of tax hikes, spending redirection and bond issuance. As a rough proxy of costs, one can look at the 1995 earthquake where the reconstruction costs approximately matched the capital destroyed. Not including the damage from the nuclear crisis, which is an important omission, the BOJ estimates that the capital damage to Japan is near JPY17 trillion (~$210 bln vs $5 trillion GDP).

Third, a sharp contrast was evident between how the US consumers responded to the 9/11 tragedy and how Japanese consumer responded. In the US, recall the President encouraged people to go shopping. Auto companies, like GM, rolled out new incentives. Auto sales surged, even if it was primarily an East coast phenomenon. In Japan, there was voluntary restraint. More recently, the people of the stricken area (Tohoku) have indeed been shopping and apparently replacing the consumer durable goods destroyed. In Japan, the cooperation between people and companies, speaks, it seems to high levels of social trust.

Fourth, the BOJ is not convinced that deflation has been convincingly arrested. CPI excluding perishables, is expected to be 0.6%-0.8% this year and 0.6%-0.7% next year. The point forecast of 0.7% for both years has not changed from prior to earthquake and tsunami.

Fifth, the BOJ did not seem particularly optimistic about long-term growth prospects. They recognize that long-term growth is a function of labor force growth and productivity. The work force is projected to continue to decline, whereas it does not appear that the BOJ expects a increase in productivity growth, which in the 2000-2008 period have averaged about 1.5% per year, about the same as the UK, which is better than Germany and France (~1.0%) and Canada (~0.75%). Rounding out the G7, the US is near 1.75% and Italy is slightly negative.

Sixth, the BOJ suggested there are some fresh initiatives about immigration, but recognize the there is not much that can be done to produce a relatively quick reversal in the shrinking population, however, consistent with what we have argued before, the BOJ recognized that increasing the female participation in the work force would be very helpful. The female participation rate in Japan is about 48.6%. This compares with 52.9% in Germany and 59.2% in the US.

Seventh, it seemed noteworthy that the yen’s exchange rate was barely discussed. There was some discussion of its role in dampening inflation. The dollar is spending its eighth day below JPY80, the longest period ever. That this was not an important part of the BOJ’s economic analysis is revealing. It reconfirms our argument that the risk of intervention is lower than many may perceive by focusing on a fixed chart point.