Asian Trade Prices; Germany's Industrial Economy; Japan's Private Sector Savings Surplus

The shocks and surprises of last week mainly concerned the downturn in the world's industrial economy, and particularly the impact of the downturn in the capital goods sector on Germany and Japan.  The three strands that stood out for me were: 

1. US Import Prices, and the story they tell of intra-Asian competitive pressures
2.  Germany's Industrial Sector Data - Output, Orders and Exports All Crumbled in September, turning key cyclical indicators sharply negative
3. Japan's Current Account Disappointment was a further chapter in the long-running story of Japan's savings surplus running out. 

1. US Import Prices and Asian Trade

US ex-petroleum import rose 0.3% mom in October, with industrial supplies up 1.2% mom and consumer goods and F&B both up 0.2%. However, the real surprise came in the breakdown of import prices by country and region: prices of imports from China fell 0.3%, but rose 0.3% mom from both Japan and NE Asia, and 0.6% from the EU and Latin America. Such a divergence in pricing trends won’t last long. As the chart shows, the divergence between prices from Japan and China has gradually widened to its most extreme since at least 2004, and this has coincided with sharp falls in Japanese exports (down 10.3% yoy in yen terms in September), and a spike in inventory/shipment ratios (see last week’s Espresso). 

The result is that we must expect Japanese export prices to  fall in the coming months. But so too will prices from Asean, where historically trade prices have converged with China’s. The Singapore dollar has weakened slightly against the Rmb from its mid-September peak, but the fall in China’s trade prices to the rest of the world suggests there’s more to come. Meanwhile, their differing pricing structures suggest that S Korea and Taiwan have evolved an industrial structure which is competing directly neither with China/Asean nor Japan. 

2. Germany Industrial Economy The week brought a spate of bad news about the state of Germany’s industrial economy in September: manufacturing/mining fell 2.3% mom, factory orders fell 3.3% mom and exports fell 2.5% mom.  This is testament mainly to the capital goods basis of its industrial base: output of capital goods fell 3.5% mom, and orders for capital goods fell 2.4% mom (orders from the Eurozone fell 9.3% mom). The relationship between new orders and output is, of course, a reasonable early cyclical indicator – a sort of book-to-bill ratio.  And the pattern of this ratio is strikingly similar to the spike in Japan's inventory/shipment ratio which we noticed last week. The ratio has been deteriorating since July last year, and September’s data took it to the the lowest level since mid-2009. 

3. Japan Current Account and Private Sector Savings Surplus 
September’s current account surplus sank to Y503.6bn, which was a shock to consensus, albeit the consensus was more difficult to explain than the result: the trade and services deficits were both in line with trends, as was the Y1.309tr income surplus which now buttresses the current account. 

The relevant shock is not therefore the current account surplus itself so much as what it tells us about the rapid and accelerating erosion of Japan’s private sector savings surplus – ie, the flows of cash which underpin Japan’s economy. During 3Q, rapidly has fallen sharply over the last two months. The combination of September’s build-up in domestic government debt and the current account position tells us that Japan’s private sector had a Y6.54tr savings deficit during the month. During 3Q Japan’s private sector ran a savings deficit of Y3.86 tr, equivalent to 3.4% of GDP, and compared with a surplus of Y4.11tr in the same period last year.  For the 12m to September, Japan’s private sector savings surplus had dwindled to just 1.6% of GDP, down from 8.9% in the same period last year.  

Throughout the entire lifetime of modern Japan, the assumption that a flow of ‘surplus’ private sector savings will underpin virtually any fiscal excess has been well-founded. That assumption is no longer justified: Japan's fiscal position is now financed by the central bank's quantitative easing, not Japanese private savings flows.