My Advice: Watch Japan

See previous post before this one and also this one from the latest edition of The Economist. It seems as if pundits finally have begun to see that something might not be as we expected.

'A big revision of Japan's inflation figures last week suggests its central bankers may be making the opposite mistake.

The Bank of Japan (BoJ), along with everyone else, had been under the impression that the country escaped deflation late last year, and that consumer prices, excluding fresh food, were now rising at the heady annual rate of 0.6%. Having raised interest rates from the floor in July, the BoJ was expected to do so again this year.

Not any more. Last week, the islands' number-crunchers carried out their five-yearly overhaul of the inflation figures. The new numbers use a more recent “base year” (2005, not 2000), and track the cost of a more up-do-date basket of 584 goods. Hijiki, an edible brown seaweed, is in; “standard” rice is out; doughnuts are included, norimaki sushi tossed aside; fees for dancing school will be counted, those for dressmaking school will not.'

This reshuffling of the statistician's shopping basket has rewritten recent history (see chart). Japan, it now seems, did not escape deflation definitively until July, when the core annual inflation rate reached 0.2% for only the second month in a row. As Richard Jerram, of Macquarie Research in Tokyo, puts it “price pressures today are where the BoJ thought they were six months ago.”'

And suddenly the Yen does not look that perky either ... (From Bloomberg) 

'Investors should reduce bets on how much the yen will gain against the dollar and euro this year on evidence Japan's economic growth is slowing, according to Lehman Brothers Holdings Inc.

The yen yesterday touched a six-week low against the dollar and a record low against the euro. Government statistics in August showed economic growth was slower last quarter than most analysts anticipated and consumer prices rose less than half the median forecast. The reports dimmed expectations for a second interest-rate increase by the Bank of Japan this year.'

No one can tell where Japan is going here but all that talk about a sustainable recovery must now be in the past I should say. I am not saying it won't happen, the recovery that is, but at this juncture I do not think anyone can claim it will.