• Japan’s economy is once again growing, with its gross domestic product (GDP) rising 3.7% in the second quarter. A rebound in exports to China and a large stimulus program helped Japan bounce back from contraction that, at an annualized rate of 11.7%, was more than double that of the United States’ in the first quarter. Officials at Japanese companies think the nation’s worst recession since World War II is nearly over, according to a survey released last weekend.

• The National Association of Home Builders/Wells Fargo confidence index rose to 18 this month, a one-year high, Bloomberg Newsreported. Still, a reading below 50 means most respondents view conditions as poor. “Inventory is being cleared and that is starting to benefit the new-home market,” Julia Coronado, a senior economist at BNP Paribas SA in New York told Bloomberg. “With a few months’ lag, that will lead to a turnaround in construction activity.”

• The Federal Reserve Bank of New York’s general economic indexrose to 12.1, higher than forecast and the first increase since April 2008. Any reading above zero indicates that manufacturing is growing. “Inventories were drawn down to such amazingly low levels that companies need to start bringing them back,” said Tom Porcelli, a senior economist at RBC Capital Markets Corp. in aBloomberg News interview. “We are coming out of the recession.It’s probably over at this point.“

• Credit card default rates showed signs of stabilization in July,Reuters reported, citing regulatory filings by multiple large U.S. banks. Bank of America Corp. (NYSE: BAC), the bank with the highest default and delinquency rates saw its charge-off rate shrink slightly to 13.81% in July from 13.86%. “It just seems to bear out what we heard in the second-quarter calls, that things seem to be getting marginally better — and I would stress marginally — on the consumer side,” Nancy Bush, founder of NAB Research, said of Bank of America.

• Microsoft Corp. (Nasdaq: MSFT) and General Electric Co. (NYSE: GE) joint venture MSNBC.com has acquired “hyperlocal” news and information Web site EveryBlock. Terms were not disclosed, but in June Time Warner Inc.’s (NYSE: TWX) AOL acquired a similar Web site, Patch for $7 million, The Washington Post reported. EveryBlock offers news in 15 cities. “Joining with MSNBC.com gives us the resources to turn EveryBlock from a cool, useful service into something much bigger,” said Adrian Holovaty, founder of EveryBlock. Holovaty and the company’s staff of five will remain based in Chicago.

• Reader’s Digest Association Inc., whose namesake magazine says it is the bestselling magazine in the world, has filed for Chapter 11 bankruptcy protection as a part of a prearranged plan with lenders to cut debt by 75%. If the court approves the deal, Reader’s Digest’s debt would be reduced to $550 million from its current $2.2 billion. “Our deal has already been negotiated and hammered out with a majority of our creditors,” said Chief Executive Officer Mary Berner in an interview with Reuters. The announcement “doesn’t affect our employees, it doesn’t affect the vast majority of vendors, it doesn’t mean we’ll do mass layoffs, it doesn’t mean we’re going to be selling off assets. It’s business as usual.”

• Continuing weak demand, bad weather and charges related to the halting of its expansion contributed to a 19% drop in Lowe’s Cos.’(NYSE: LOW) second quarter earnings. The world’s second-largest home improvement retailer after Home Depot Inc. (NYSE: HD) saw its profit fall to $759 million, or 51 cents a share for the quarter ended July 31. That compares to a net income of $938 million, or 63 cents a share in the same period last year. Sales fell 4.6% to $13.84 billion and same-store sales dropped 9.5%.

Source: Investment News Briefs Tuesday, August 18, 2009

At least the Europeans are owning up to the fact; in the U.S. investors are still pretending that the emperor’s new clothes are real. The pan-European Dow Jones Stoxx 600 index is down 1.2%, down the second day in four.

Shanghai stocks have also taken a bath. They’ve suffered their worst fall since November. This time, the worry is that the Chinese government will tighten its loosey-goosey monetary policy. According to MarketWatch, “The Shanghai Composite Index dropped 5.8% to 2,830.63, closing below the 3,000-point level for the first time since the end of June.”

Japanese shares are also down, despite recent data showing that the Japanese economy expanded during the second quarter. Japan’s Nikkei 225 Average fell 2.2% in today’s trading in Tokyo, after ending at its highest level since October on Friday.

Is this tidal wave of losses and bad news going to hit US shores? It wouldn’t surprise us in the least, dear reader. We’ve been calling the end of this sucker’s rally for months now – sooner or later we’ve got to be right! Our bet is it won’t survive September.

As we pointed out in last Tuesday’s Notes, options traders are now betting that the VIX – the widely watched volatility index – will spike 13% over the next five weeks – the biggest spread since August 2008… just before the S&P 500 saw its worst two-month plunge in 21 years.

But it’s just a hunch… Anything could happen in the Twilight Zone economy. Every time we look at the US stock market shooting higher we’re reminded of horror-movie zombies clambering out of their graves and shuffling around in search of human flesh.

We think the analogy is apt. According to the tenets of voodoo, where the zombie myth originated, a “bokor” (an African or Haitian sorcerer) can revive people from death and take control of them.

In the case of the US stock market, the bokor is none other than Ben Bernanke; the magic reviving ingredient, of course, is the excess liquidity he’s pumping into the economy.

As we pointed out on Wednesday, a study by Deutsche Bank economist Sebastian Becker shows that excess liquidity – measured as a rising stock of money to GDP – is now being created in the US, British, Japanese, Canadian and euro zone economies faster than in the late 1990s stock-market bubble and the subsequent housing boom.

The more we think about the zombie analogy, the more we like it. We recall the work of Harvard ethnobotanist Wade Davis, author of The Serpent and the Rainbow.

It’s a spooky tale, but in 1982 Davis traveled to Haiti on the trail of real-life zombies. He made the controversial claim that Haitian bokors turned living people into zombies by administering two special powders into the bloodstream. This from Wikipedia:

The first, coup de poudre (French: ‘powder strike’), includes tetrodotoxin (TTX), the poison found in the pufferfish. The second powder is composed of dissociatives such as datura. Together, these powders were said to induce a death-like state in which the victim’s will would be entirely subject to that of the bokor.

In our view, Mr Market is in a “death-like state” right now. All that excess liquidity is fuzzing up his brain, and he can’t help but shuffle along thanks to the twin “coup de poudres” of monetary and fiscal stimulus.

How else do you explain investors’ brain dead belief that we’re back in a secular bull market? As Gluskin Sheff’s David Rosenberg pointed out last week:

With every 1 in 8 Americans with a mortgage either in arrears or in the foreclosure process; 1 in 4 homeowners “upside down” on their mortgage; 1 in 6 either unemployed or underemployed; and 1 in every 7 housing unit in the United States sitting vacant right now, it will be interesting to see exactly what sort of recovery we end up with.

In among the “green shoots” there’s still plenty of really ugly data emerging. US foreclosure data for July has hit a record of 360,149. That’s up 7% month-on-month and up a truly shocking 32% year-on-year.

US July retail sales news was almost as bad. Last month’s sales were expected to rise by 0.8% month-on-month. Instead, they came in at -0.1%. The problem is July was supposed to be a positive month because of the feds’ “cash for clunkers” program.

Then you’ve got corporate revenues. Pick up a newspaper and you’d be forgiven for thinking that corporate revenues are up. But the reality is that earnings are beating estimates thanks to cost-cutting, not top-line revenue growth.

The truth is corporate revenues were down -10% in the second quarter. When the market started its recovery in 2003, revenues are up 13% in the first quarter. And they continued to rise into the bull run that followed.

Still, 27 out of 47 economists surveyed recently by the Wall Street Journal say the recession has ended. Problem is they’re probably the same 27 economists who thought the US economy wasn’t in trouble following the August 2007 subprime collapse!

Here’s what the mainstream either doesn’t know or doesn’t want to let on it knows. On average unemployment rises for five years following a financial crisis. That means another 2.5 years of rising jobless rates and contracting consumer spending.

But that’s not what really scares us, dear reader. Downturns are to be expected; the economy is cyclical after all. What scares us is the black magic being used by the feds to ‘fix’ things – the economic voodoo of the government’s printing presses. This from underground investor Porter Stansberry in today’s DailyWealth:

There is no way for an economy to outrun a printing press. The Fed has the power to create an unlimited amount of money or credit and the power to inject that money into the economy in any way it sees fit.

Let’s look at the numbers. Let’s assume the total collateral damage of the banking crisis turns out to be $5 trillion. Yes, that’s a huge hit – roughly half the output of our economy each year. It’s the equivalent of sending every American household a bill for $50,000 – due immediately. However, in less than a year, the Feds have already created nearly $4 trillion in new money and credit. The hole in the system has already been plugged. It only took a few months.

The fight between inflation and deflation is over. Deflation was knocked out in the first round.

The big risk is what happens next. Having turned on the presses to save the day, who will have the political clout and the desire to shut them off? Barack Obama’s budget calls for annual deficits in excess of $1 trillion for the next eight years. Thus, by the end of this year, not only will all of the damage from the mortgage collapse ($5 trillion) be replaced by new money and credit, there will be significant inflationary pressures in the economy.

The good news in our economy this year, so soon after such a major collapse, means we will certainly have a massive inflation during 2010 and 2011. There’s no such thing as a free ride. Bailing out the banks will carry a heavy price for anyone who doesn’t have the resources or the knowledge to escape the dollar.

What should investors do to protect themselves? That’s the easy part. According to Porter the best way to survive and prosper in the coming inflation is to own plenty of gold bullion and “assets that will run higher in an inflationary environment, like transportation and energy assets.” Porter also recommends owning some good farmland.

Here at Notes, we think it’s a lot more practical, however, to own a good quality agriculture fund. We like PowerShares DB Agriculture Fund (NYSE: DBA).

The opposition has different ideas about what the Japanese economy looks like. That means you should be buying different Japanese stocks, not the well-known names.

The Liberal Democratic party (LDP), in power since 1954 except for 11 months in the 1990s, hasn’t done a bad job. After all, Japan is hugely richer than in 1954. However, after a successful period in 2001-06, the country has had three prime ministers in three years. The current leader, Taro Aso, believes in heavy government spending, particularly on infrastructure. That reflects the party’s traditions, which have favored exporting companies and the construction sector. Those traditions and priorities have also made Japan’s public debt 180% of gross domestic product (GDP).

The opposition Democratic Party of Japan includes the Socialists, and favors higher social spending. However, it also wants to encourage domestic consumption, and to kill the big construction projects on which the LDP has spent so much. Economically, the Democratic Party’s platform makes sense, certainly given its shift in emphasis away from the programs focused on in the last few years. Politically, voters are tired of the LDP and badly want a change. Hence the DPJ is likely to win a majority in next month’s election.

That probable victory has major implications for investors.

• For starters, let’s consider the big exporting companies. Such players as Panasonic Corp. (NYSE ADR: PC), Sony Corp. (NYSE ADR: SNE) and Hitachi Ltd. (NYSE ADR: HIT) – may become less prominent, as they won’t have such strong backing from the government bureaucracy. The construction companies – Komatsu Ltd. (OTC ADR: KMTUY), Kajima Corp. (OTC ADR: KAJMY),Sumitomo Realty & Development Co. Ltd. (OTC: SURDY) and the like – will do less well.
• On the other hand, domestic-oriented companies, particularly in consumer products, should benefit. Low-end consumers may do better than high-end, so we’ll look for basic goods.

The Japanese market is still down more than 75% from its 1990 high, although it has rebounded about 30% from its March lows. Japan had a bad recession: The Economist expects 2009 GDP to be 6.1% below 2008. Nevertheless, the economy looks poised for recovery. If that happens, the market will do well, and consumer-oriented stocks will do especially well. Many Price/Earnings (P/E) ratios look high – as is common in Japan – but Japanese accounting is conservative and a real economic recovery could bring rapid earnings growth. Still, in searching for the most-promising profit plays, I will look for P/Es of 20 to 22, or less, to keep values reasonable. How to buy them: Most Japanese companies these days trade as American Depository Receipts (ADRs), that trade only on the “Pink Sheets.” Those are not very liquid in New York. However, some brokers – such as E-Trade (Nasdaq: EFTC) – now allow you to trade directly on the Tokyo stock exchange. So I’ll give you both the Tokyo symbol and the OTC ADR symbol, and you can choose which way to go. Here are the seven ways to play Japan’s election (with one bonus pick for good measure):

• Kao Corp. (4452; OTC ADR: KCRPY) is a classic consumer-products company – kind of like a Japanese version of The Procter & Gamble Co. (NYSE: PG) here in the United States. Kao produces cosmetics, laundry and cleaning products, making it a domestically oriented company that should do well as Japan’s consumer spending improves. Stock stats: The company’s stock trades at 17 times earnings and yields 2.7%.

• Kirin Holdings Co. Ltd. (2503; OTC ADR: KNBWY) produces beer, soft drinks, food products, whiskey and pharmaceuticals. In addition to its strong position in Japan, Kirin is a major player in the East Asian market. Stock stats: P/E ratio 16; stock yields 1.6%.

• Circle K Sunkus Co. Ltd. (3337; PINK: CLKSY) is a nationwide convenience store chain that sells food, beverages and gaming software. Stock stats: P/E ratio 13; dividend yield 2.7%.

• QP Corp. (2809; OTC ADR: QPCPY) produces mayonnaise, salad dressing, egg products and health foods. Stock stats: P/E ratio 17; dividend yield 1.5%.

• Showa Sangyo Co. Ltd. (2004; OTC ADR: SHSGY) produces and sells flour, cooking oils and confectionary products. Stock stats: P/E ratio 19; dividend yield 2.4%

• Seven and I Holdings Co. Ltd. (3382; PINK ADR: SVNDY) is a merger of Ito-Yokado, 7-11 Japan and Denny’s Japan. It operates convenience stores, food stores and fast food restaurants.Stock stats: P/E ratio 22; dividend yield 2.5%.

• Eisai Co. Ltd. (4523; OTC ADR: ESALY) produces and sells prescription drugs and medical equipment in Japan and overseas. Stock stats: P/E ratio 19; dividend yield 4.2%.

Check the companies carefully before investing (most have Web sites), but the above are some suggestions of companies in interesting sectors that appear solid and not overpriced. If you don’t feel confident about investing directly in Japan, you could also consider investing in the largest Japan-focused exchange-traded fund (ETF), iShares MSCI Japan index (NYSE: EWJ). The EWJ ETF currently has a P/E ratio of 15. 

Source: Eight Ways to Profit From Japan’s Game-Changing Election

Editor’s Note: When it comes to global investing, longtime market guru Martin Hutchinson is one of the very best – because he knows the markets firsthand. After years of advising government finance ministers, crafting deals with global investment banks, and analyzing the world’s financial markets, Hutchinson has used his creative insights to create a trading service for savvy investors.

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Field Reporter: Are they slow-moving, chief?
Sheriff McClelland: Yeah, they’re dead. They’re all messed up.
– Night of the Living Dead (1968)

In B-grade horror movie lore, Tokyo has to fend off attacks from rampaging monsters like Mothra and Godzilla. If the cinema were more true-to-life, however, Japan would be less worried about overgrown fire-breathing lizards… and more terrified of zombies instead.

In response to a recent Taipan Daily asking what brought us out of the Great Depression, a number of you responded with a good question. “What about Japan?” Or rather, “What about Japan’s extraordinary rate of consumer savings – and why hasn’t it helped?”

The Nikkei chart above shows the extraordinary extent of Japan’s pain.

After putting in a massive blowoff top to cap a truly insane 1980s bull market, Japanese stocks proceeded to head lower… for the next twenty years. The Nikkei is now less than a quarter of its value at the 1990 peak – a 75% decline over two decades in which the rest of the world boomed. Meanwhile Japanese real estate, depending on location, is down anywhere from 50%-80% from the 1990 peak. And depending on how things play out, prices might fall lower still before all is said and done.

(By the way, just as an aside – the next time someone extols the virtue of passive index funds and “stocks for the long run,” consider showing them this chart. As legendary natural resource investor Rick Rule likes to say, “You’re either a contrarian or a victim.” Few markets showcase the brutal truth of this statement like Japan.)

How in the World…?

So how in the world did this happen? How did the second largest economy in the world – and the benchmark index for one of the richest, most prosperous countries in the world – wind up in a two-decade slump?

In a word, “zombies.”

George Romero’s zombies liked to eat brains. Japan’s zombies prefer to eat wealth. In the past 20 years, as the Nikkei outlook went from ugly to bad to worse, Japan proved itself to be a world champion wealth destroyer…

The Rise and Fall of Japan Inc.

Japan first established itself as an economic powerhouse in the aftermath of World War II. Once known for shoddy, low-quality, knock-off type goods, Japan eventually morphed into a juggernaut in high-tech areas like robotics, electronics and automobiles. Today, companies like Toyota and Honda remain the standard for cutting-edge efficiency, quality control and incremental innovation.

In the 1980s, when the country reached the pinnacle of economic might, Americans feared that “Japan Inc.” would soon dominate the West – and perhaps even own the United States outright. Television programs like “Lifestyles of the Rich and Famous” spoke breathlessly of unknown Japanese businessmen worth untold billions (back when “billion” was still a big number). Western minds were concentrated by the spectacle of Japanese buyers snapping up real estate icons like Rockefeller Center. The Japan Inc. juggernaut looked unstoppable.

And what exactly is “Japan Inc.,” you ask? Investopedia defines it as “a nickname for the corporate world that came about during the 1980s boom, when Western business people saw how closely the Japanese government worked with its nation’s business sector.”

On the whole, one could think of Japan like a giant aircraft carrier. In the 1980s, the aircraft carrier was chugging along in exactly the right direction, with MITI (Japan’s Ministry of International Trade and Industry) plotting the course.

The trade-off for running such a concentrated top-down plan, however, is an utter lack of flexibility. An aircraft carrier can’t turn on a dime. It can’t even turn on a football field. It has to go miles and miles out of its way just to make a small adjustment in course.

By the end of the 1980s, the global economic landscape (or seascape rather) had shifted. For the first time in years, flexibility was once again at a premium over relentless focus. Given this sea change, the “Japan Inc.” mindset turned from blessing into curse. The country lost its way.

Mega-Boom and Mega-Bust

In the go-go 1980s, Japan also experienced a fantastically epic stock market and real estate bubble. At the height of this bubble, Japanese companies were trading at 60 or 70 times earnings as the Nikkei climbed towards 40,000. The real estate situation got so out of hand, the patch of land under the Imperial Palace in Tokyo was at one point deemed more valuable than all the real estate in California.

This insane mega-boom led to an equally insane mega-bust. And this is where Japan’s problems really began. When market forces turned against it, the country didn’t know how to handle it.

There is a saying (attributed to various sources) that “capitalism without bankruptcy is like Christianity without hell.” That is to say, it just doesn’t work. Without the threat of punishment, sinners have no reason to repent from their wicked ways. And without the discipline of bankruptcy, a market has no means of cleansing and renewing itself.

One of the major problems Japan has wrestled with these past 20 years is the need to liquidate and start fresh – and the consistent refusal to do so. The Japanese “zombies” mentioned earlier in the piece are zombie banks and zombie corporations… “living dead” type organizations that shamble on aimlessly, gobbling up manpower and resources, kept from their natural graves by routine capital injections from the state.

The Nail That Sticks Up Gets Hammered

Part of the problem, it seems, is the distinctly Japanese preference for unity and harmony over diversity and discord. I am no expert on Japan, but everything I have seen, heard and read seems to emphasize this preference.

There is a phrase that encapsulates Japanese corporate culture: “The nail that sticks up gets hammered.” In other words, it’s better not to make waves… to keep your head down and stay loyal to the organization.

For a long time the unofficial mascot of Japan was the sarariman, or “salaried man” – the white collar Japanese worker who rose through the ranks of a single company and stayed with that company for life.

The deep desire to remain loyal and not make waves influences Japanese corporate culture at the higher levels too. Another distinctly Japanese concept is the keiretsu, which Wikipedia defines as “a set of companies with interlocking business relationships and shareholdings.”

For many decades – from the post-World War II renaissance through the end of the 1980s – the “Japan Inc.” system worked and worked well. The loyal sarariman found lifetime employment with his parent corporation, which in turn strengthened its business ties via the keiretsu. And the Japanese government coordinated the efforts of the keiretsu through MITI (which has since been replaced by METI, the Ministry of Economy, Trade and Industry).

Here Come the Zombies

The “zombies” arose from Japan’s desperate need to preserve not just a way of doing business that had long worked well, but also a culture and a way of life. To let loose the raging forces of creative destruction would be an uncouth, uncivil, unloyal thing to do in the Land of the Rising Sun. It was simply not the Japanese way.

And so Japanese corporations held on to their workers as long as they could. It was not an unheard of thing for a hapless sarariman, no longer with work to do but still supported by his employer, to come in and sit at an empty desk for eight hours, then go home.

The Japanese government kept exactly the same mindset. Banks and corporations were to be rescued, not liquidated. Meanwhile, in the hopes of stimulating the Japanese economy back to growth, staggering sums were plowed into useless construction projects – highways, roads, tunnels, “bridges to nowhere” all over the country. None of it worked.

Paradoxically, Japan’s wealth worked against it in this case. The country was able to afford such expensive measures – in effect, to pour money down a huge rathole for 20 years – because Japan was (and still is) rich.

A Vicious Deflationary Circle

Now we can circle back to the original inquiry, as to why accumulated Japanese consumer savings couldn’t break the two-decade slump.

As best as this observer can tell, the problem was something of a vicious circle that kept Japan’s economy in the dumps. This bogged-down state of affairs was created by wealth-destroying government policy and enabled by a wealth-destroying corporate mindset.

Japan is unique in that something like 95% of Japanese government bonds are domestically owned by Japanese institutions with ties to the government. Unlike America, which has borrowed staggering sums from the rest of the world, Japan has more or less borrowed staggering sums from itself.

This habit of borrowing huge sums, pouring them into the maw of zombie banks and corporations, and then repeating the process all over again, has managed to keep Japan’s domestic economy in an almost permanent state of funk. No liquidation of zombie companies means no room for vital new growth. An overhang of stagnant bureaucracy means a lousy employment situation, which in turns encourages Japanese consumers and companies to save.

Consumer and company savings then go into JGBs (Japanese Government Bonds), which pay painfully low interest rates, because there are few better places for it to go. Meanwhile, when Ms. Watanabe looks around she sees prices gradually falling, not rising… and so the Japanese economy gets saddled with a deflationary mindset on top of everything else.

A Cautionary Tale

All in all, Japan presents a cautionary tale. Without a vital center of “creative destruction,” capitalism simply cannot work.

In a forest, dead trees eventually fall to the ground and decompose. This natural birth-death process gives nutrients to the soil and opens up the leafy canopy to sunshine and new growth. But without death you don’t get rebirth… you just get stagnation.

Interestingly, too, people forget that 20 years is not the same as forever. Japan has been able to go on for decades as it has precisely because the country is so rich. Via issuance of JGBs and the propping up of unproductive enterprises, the government has been able to squander wealth on an epic scale because Japan had so much stored wealth to squander in the first place.

But there will come a day – perhaps not all that far off – when Japan runs out of capacity to borrow. At some point, no one will lend more money to debt-laden, zombie-prone Japan… not even the citizens and corporations of the country itself.

When that happens, we may well see a “big bang” of supernova-style proportions as the Japanese government is forced to do something drastic. Wouldn’t it be ironic if, after 20 years of fearing inflation and pursuing muddy stagnation-type policies, the Japanese Central Bank were forced to bring about one of the most explosive currency devaluations of all time?

Thankfully, there are reasons why America will not automatically be consigned to Japan’s interminable fate. A taste for creative destruction, a diehard entrepreneurial spirit, and the opportunity to benefit from breakthrough technology are three possible “escape hatches” that come to mind.

The pressing lessons for Western policy makers (currently hoping to circumvent the Japan experience) are ominous: Do not assume that a fat checkbook is the answer. Beware the politics of consensus and the grasping hand of bureaucracy. Short-circuit creative destruction at your peril.

Will they get it right? Guess we’ll see…

Source: The Zombies That Ate Japan’s Recovery

Despite the disturbing news from Japan – the world’s second largest economy – some analysts are optimistic that the record gross domestic production (GDP) decline may be the low point, with business activity picking up from here.

“There was a collapse across the board,” Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo, told Bloomberg News. But there’s “light at the end of the tunnel,” he said, adding that he believes the economy will rebound this quarter as companies replace inventories and stimulus plans begin to take effect.

Prime Minster Taro Aso has set forth the largest stimulus plan in Japanese history, promising to pump $160 billion into the economy, mostly geared towards lifting consumer spending, which accounts for about 55% of GDP.

Japanese consumers were the biggest factor in the decline. Consumer spending fell 1.1%, trimming 2.6 percentage points off GDP – the most since 1974, Bloomberg reported.

Analysts say that declining exports are a big reason for the decline in consumer spending.

“The export plunge is spreading to domestic demand,” BNP Paribas SA (OTC: BNPQY) economist Hiroshi Shiraishi told Reuters. “As such, the Japanese economy may return to growth temporarily but it could suffer a contraction again afterwards.”

Net exports – the trade gap between exports and imports – shaved 1.4% off overall economic output.

Toyota Motor Corp (ADR NYSE: TM), Hitachi Ltd. (ADR NYSE: HIT), and Panasonic Corp. (ADR NYSE: PC) all projected mounting losses for fiscal 2009. Panasonic said last week it plans to close about 20 factories this year and cut 15,000 jobs. Hitachi will slash spending by $5.2 billion this year and shed 7,000 workers, Bloomberg reported.

Still, there are faint signs of recovery in both exports and consumer spending, triggering cautious optimism among some analysts and government officials. Consumer confidence jumped to a 10-month high in April and exports increased in March over the previous month.  Factory output also jumped for the first time since September as companies cut inventories.

The Wall Street Journal reported last week that Honda plans to increase production in Japan this quarter as dealers have begun clearing inventories.  Car sales may have “bottomed” in Japan and the U.S., Fuji Heavy Industries Ltd. (ADR OTC: FUJHY) President Ikuo Mori said in Tokyo, according to Bloomberg.

“While the economy will continue to be in a severe state, I expect less pressure from inventory adjustments and the stimulus package to provide support,” Economy and Fiscal Policy Minister Kaoru Yosano said after Wednesday’s report, Bloomberg reported.

Source: Japan GDP Falls to Record Low but May Have Bottomed

Japan’s exports for February were down a shocking 49.4% on a year-over-year basis. The Japanese economy suffered a fourth-quarter decline of 3.2% – twice the decline of its U.S. counterpart – and is expected to drop by a similar amount during the current quarter.

What went wrong? And, for us investors, are the low current prices of Japanese stocks a buying opportunity or a trap?

Partly because of its efficiency and my fondness for sushi, I have always been inclined to favor Japan and Japanese investments. In 1989, it was obvious that the market was overvalued and I said so – in the process alienating several of my friends who thought they had found safe career niches managing investment funds investing in Japan.

In the 1990s, it was obvious that whatever Japanese governments were doing didn’t work, so I welcomed the 2001 arrival of Junichiro Koizumi as prime minister, and from there wrote frequently about Japan’s growth prospects – until last year.

Until August last year, it looked as though I would be right in the long run, even if the Japanese stock market tended to droop. Since September, however, it has all gone wrong; Japan’s economic performance has gone from adequate to truly dreadful.

Pinpointing the date enables us to pinpoint the reason. In September, Japanese Prime Minister Yasuo Fukuda, who had supported Koizumi’s policy of public-spending restraint, resigned and was succeeded by Taro Aso, still of the long-governing Liberal Democrat Party (but from its opposing faction). Aso is an enthusiastic proponent of “stimulus” public spending programs, particularly on public works in rural constituencies. That’s the policy that notably failed to conquer recessionary conditions in the 1990s, leaving Japan with a public debt equal to 160% of gross domestic product (GDP).

Aso has already proposed four stimulus programs, raising Japan’s budget deficit from 3% of GDP in 2007-2008 to an estimated 11% of GDP in 2009-10. The public debt/GDP ratio is rocketing upwards, because of public borrowing and the decline in GDP. Interest rates, which had been rising gently towards normal levels in 2006-08 (though short-term rates had only reached 0.5%), have been reduced to zero again and the Bank of Japan (BOJ) has begun “quantitative easing” – buying up government debt.

Currently, there’s a general agreement among Western politicians that these are the policies to follow. So why haven’t they worked in Japan?

At this point, the London merchant banker in me is irresistibly tempted to snarl: “Because they don’t (expletive-deleted) work in general.”

My own preference is for balanced budgets, low public spending and high interest rates – you may not get much economic growth with those policies, but what you get you’ve earned – without burdening your grandchildren. Even now, some countries – such as Brazil – are following those policies, and doing quite well.

Setting aside the question of whether stimulative policies work in general – within a year or so we shall have tested them exhaustively in the United States and most of the western world – I do think there may be reasons why they work particularly badly in Japan. Japan has traditionally had very high savings rates; it still has a limited Social Security system and an aging population. Low interest rates may well therefore damage demand from consumers living off savings more than they boost demand by helping companies and other borrowers. While low interest rates boost exporting companies, that boost may simply raise the yen exchange rate to a level at which in a recession exports fall catastrophically.

As for budget deficits of 11% of GDP, if you already have a public debt in excess of 160% of GDP, you may well be at the point at which the extra debt and the uncertainty about how you are going to pay it all back eliminate any boost to demand that the budget deficits would normally bring.

It is thus clear that Aso’s policies will work less well in Japan than they would elsewhere. Indeed, they may make matters worse in Japan, even if they would be effective in some other countries.

Japanese voters will have a chance to choose something different at a Diet election due in September or before. The bad news is that, while the opposition Democratic Party of Japan is theoretically pro-market, its leader, Ichiro Ozawa, in practice is a former LDP stalwart, of the faction founded by 1970s’ kingpin Kakuei Tanaka that favored heavy public spending.

Furthermore, many of Ozawa’s supporters, from the former Social Democrat party, also favor heavy public spending, albeit on different things than the LDP barons. In other words, an Ozawa victory may not bring much of a policy change, at least on economics. What’s more, Ozawa himself has now been caught up in a campaign-fund scandal, so even though Aso’s popularity ratings are down to around 10%, the LDP still may win – which would boost Aso at the expense of the free-market Koizumi supporters.

The bottom line: In the election this year, if the Japanese people want the economic policies that seem to work, they will have to be damn clever about it. There are many supporters of free-market policies in both the LDP and the DPJ, but they are not currently represented among the leadership of either party.

Japan remains a country in which everything works beautifully – except the politics. But the country is still worth keeping an eye on, though, because if the politics change, the potential from a Japan with higher interest rates and lower public spending is absolutely gigantic.

Source:  Investing in Japan: Lots of Potential, Little Growth

This from Justice Litle:

“You can’t put a percentage figure on the market drop. In fact, there isn’t a market at all.”

“The scary thing is, they’re nowhere close to facing reality… the official listings have only reduced prices by 10-20%, even with no buyers in sight, and builders are hoping to build more…”

Meanwhile, in the United States, the S&P has completed 6 quarters of negative growth and is now registering it first quarter ever of negative earnings. That’s right, dear reader, put all the S&P companies together. Add up their earnings. Subtract their losses. Result: net losses.

MarketWatch reports:

“A sixth quarter of negative growth ties the prior record set when Harry Truman was president, running from the first quarter of 1951 to the second quarter of 1952.

“‘Next quarter, we’re expecting a new record of seven quarters of negative growth,’ said an analyst.

“As of the close of business Thursday, [he] calculates S&P earnings per share, on a reported basis, at a loss of $10.44 for the quarter. If financials were taken out of the equation, that deficit would drop to $2.35 a share.”

We are in a period of price discovery. Many shares, businesses, and credits are on offer. Typically, people are reluctant to make bids until they have a clearer idea of what these things are worth. What are they worth now that we’re in a post-Bubble world? No one knows. And no one seems in a hurry to find out.

Even in Japan, the search for the bottom continues. It hardly seems possible. The Japanese economy was already in a deep hole after 19 years of recession/depression. Now, it’s digging deeper.

The latest figures show the Japanese economy falling at a 12% annual rate – faster than ever. Well, faster than at any time during its 19-year slump. The last time the economy in Japan slumped this hard was 35 years ago.

What to make of it?

Well, the simple answer is this: while Americans consumed too much, the Japanese produced too much. The United States had far too many retail shops and service industries. The Japanese built far too many factories to stock their shelves.

And now, well…you know the story now. No shoppers. No merchandise needed. No orders for Japan. So how much are the shops worth? How about the factories? What about houses? We’d all like to know what they’re worth so we could get on with business. But Mr. Market is playing it cool. We’ll just have to wait until the bids come in.

*** Strategic Short Report’s Dan Amoss offers his two cents on Geithner’s Financial Stability Plan, or ‘TARP 2.0’:

“Part of the new Financial Stability Plan involves an unspecified ‘public/private’ partnership to buy up toxic assets. Apparently, the idea for a public/private partnership was a last-minute development leading up to Tuesday’s announcement. Word is that several prominent hedge fund managers met privately with Larry Summers, one of the administration’s top economic advisers, just days before Tuesday’s announcement.

“Here’s my guess at how this arrangement might develop in the coming weeks: Long-term financing from the Treasury to distressed debt hedge funds is a very creative way to hide a government subsidy. The potential cash-on-cash return for hedge funds interested in cheap toxic assets is probably not enticing enough for them to pay what the banks are asking. But if the Treasury acts as a prime broker by providing, say, 10-year financing at 4%, so hedge funds can lever up their equity by five times, maybe the funds will be willing to pay a bit above the banks’ asking price and still earn a decent five- or 10-year return. This is a backdoor way to recapitalize stressed banks and get toxic assets into stronger hands without exposing taxpayers to too much credit risk. Combined with a major new mortgage refinancing initiative, this might have a shot at success.

“One thing is clear: The authorities are not going to just sit by and do nothing. I’ll be looking closely at the details of the Financial Stability Plan as they are revealed in the coming weeks.”

*** At least the Japanese have an orderly society with plenty of savings to lather over their hurts. The Land of the Rising Sun is also the land of an aging, shrinking population. These old people can just wait out the slump…knowing that it might last longer than they do.

Cross the straits into China. There, same story. Different ending. China has too many factories too – at least, too many set up to produce too much stuff for too many people who can’t pay for them. China has a huge, growing population. The rate of population growth is not at high as it used to be, but the raw numbers of getting larger all the time. If you have a population of 100 million and you grow at 6% per year, you add 6 million new people to the world’s population each year. If you have a population of a billion people, and you grow at half that rate – just 3% per year – you add 30 billion new people each year.

China’s economy needs to grow at nearly 10% per year just to provide jobs for these people, say the experts. Doesn’t seem very likely – not in today’s incredible shrinking world economy.

The New York Times:

“From lawyers in Paris to factory workers in China and bodyguards in Colombia, the ranks of the jobless are swelling rapidly across the globe.

“Worldwide job losses from the recession that started in the United States in December 2007 could hit a staggering 50 million by the end of 2009, according to the International Labor Organization, a United Nations agency. The slowdown has already claimed 3.6 million American jobs.

“High unemployment rates, especially among young workers, have led to protests in countries as varied as Latvia, Chile, Greece, Bulgaria and Iceland and contributed to strikes in Britain and France.

“Last month, the government of Iceland, whose economy is expected to contract 10 percent this year, collapsed and the prime minister moved up national elections after weeks of protests by Icelanders angered by soaring unemployment and rising prices.

“Just last week, the new United States director of national intelligence, Dennis C. Blair, told Congress that instability caused by the global economic crisis had become the biggest security threat facing the United States, outpacing terrorism.”

“Millions of migrant workers in mainland China are searching for jobs but finding that factories are shutting down. Though not as large as the disturbances in Greece or the Baltics, there have been dozens of protests at individual factories in China and Indonesia where workers were laid off with little or no notice.”

The Chinese have built their factories to sell things to foreigners – notably, the most feckless consumers on the planet, Americans. It will take time to re-jig factories and marketing channels to the needs of its own market.

Remember, this is a depression. A depression requires structural changes to an economy. Those take time. The Japanese can wait. But on both ends of the U.S.-China shipping lanes there are big, big problems.

*** On the U.S. end, the pols can’t leave bad enough alone. The voters won’t stand for it. They’re going to ‘do something’ – if it kills us all. What they are trying to do is obvious – inflate away America’s debts. So far, the market has been ahead of them – wiping out more money than the feds can replace. Sooner or later, they’re bound to turn the situation around.

And Obama headed to Denver, Colorado to sign the $787 billion stimulus package.

Our guess is that the next time we come to Nicaragua our dollars will no longer get the admiring glances they bring now.

“You can pay me in dollars,” said the woman from whom we bought a watermelon yesterday.

Next time, she’s likely to want cordobas…

Source: Living in the Post-Bubble World

Figures showing Japan’s economy shank sharply in the final quarter of 2008, recording its biggest quarterly decline since 1974, helped perceived safe-haven currencies such as the dollar and the yen, propelling the dollar index to a two-month high.

Meanwhile, the lack of reference to yen strength in the final communique of Group of Seven finance ministers meeting in Rome at the weekend allowed investors to resume buying the Japanese currency.

“The data out of Japan was nothing short of shocking and there is a building sense that there are more problems ahead for the global economy,” IDEAglobal senior strategist Maurice Pomery said. This has helped support the dollar and the yen, he added.

The euro came close to a two-month low against the dollar, while sterling was near a two-week trough, with both weighed by heightened risk aversion in the market as European equities fell 1 percent.

The single currency was also pressured by fresh worries about western European banks’ exposure to troubles in eastern Europe as S&P rating agency warned it could cut the sovereign ratings of Ukraine due to refinancing concerns.

“Continuing problems with eastern European emerging markets will keep the dollar bid against the euro,” IDEAglobal’s Pomery said.

He noted, however, that trading was relatively subdued, with U.S. markets closed for a public holiday.

At 1119 GMT the dollar index was at 86.690, just shy of an earlier two-month high of 86.871, according to Reuters data.

The euro fell 0.8 percent against the U.S. currency at $1.2758 and the pound lost 1 percent to $1.4236 .

The pound also lost ground as the G7 meeting did not mention the recent sharp fall in the value of the UK currency as many in the market had expected.

Against the yen the euro dropped 1.2 percent to 117.09 yen , while the dollar dipped 0.2 percent to 91.76 yen .

The dollar earlier briefly edged into positive territory against the yen after Japanese finance minister Shoichi Nakagawa said he would resign if asked to after coming under fire for his behaviour at a G7 news conference.

It quickly turned back into the red, however, as Nakagawa said Prime Minister Taro Aso had asked him to stay on in the job, adding that he had been affected by medicine he was taking for a cold at the G7 meeting.

TRICHET EYED

With U.S. interest rates now standing at between zero and 0.25 percent and UK rates at 1 percent and expected to fall further, the focus is on what the next move will be by euro zone policymakers.

Speaking on Saturday, European Central Bank president Jean-Claude Trichet said the ECB had not drawn any particular conclusions after discussions with other banks.

Trichet is due to speak on Monday afternoon and investors will be watching closely for any clues on how much more the central bank is likely to cut rates and whether it is considering unconventional measures to boost the money supply.

“Trichet could be another hitch for the euro if it opens the door to another rate cut,” Commerzbank currency strategist Antje Praefcke said.

The ECB left rates on hold at 2.0 percent in February but it is widely expected to cut rates in March in an attempt to bolster a flagging euro zone economy.

Meanwhile, recession fears intensified after data showed an unprecedented slump in exports caused Japan’s economy to shrink by 3.3 percent in October-December, the sharpest fall since the first oil crisis in 1974.

Analysts said the grim figures weighed on higher-yielding currencies, with the Australian dollar particularly weak on concerns about a hit to its trade with Japan.

The Australian dollar was down 1.2 percent against the U.S. dollar at $0.6490 .

But the news may have bigger implications for Japan’s entire economy, as the country’s exports continue to take a beating from sagging worldwide demand for its products.

Japanese exports plunged 26.7% in November from a year ago. Shipments to the U.S. slid an unprecedented 34%, Japan’s Finance Ministry said. A strong yen, which makes Japanese goods more expensive, combined with deflated consumer spending, is hammering Japanese exporters.

Toyota will post a $1.7 billion (150 billion yen) loss in the year through March, it said in a statement, scrapping a previous forecast of a $6.6 billion. The last time Toyota posted an operating loss was in the year ended March 1938, spokesman Hideaki Homma told Bloomberg News.

“The environment we’re in is extremely tough,” President Katsuaki Watanabe told reporters in Nagoya. “We’re facing an unprecedented emergency situation. Unfortunately, we can’t see the bottom.”

U.S. auto sales are down 16% this year, led by declines of 28% for Chrysler LLC, 22% for General Motors Corp. (GM) and 19% for Ford Motor Co. (F), Bloomberg News reported. The three U.S. automakers will close about 59 factories over the next month as they struggle to avoid bankruptcy.

“It is difficult to envision any swift recovery from the present damage in the U.S., Toyota’s core market, and we anticipate increasing cuts in overseas local production,” wrote Barclays Capital (BCS) analyst Tsuyoshi Mochimaru in a research note on Dec. 19, according to MarketWatch.

Compounding the demand problem is a surging yen, which erodes overseas profits for Japanese exporters. The yen has gained 25% against the dollar this year.

But Toyota’s problems may just be the tip of the iceberg for Japan’s economy. The November export plunge was the biggest drop on record, as global demand for cars and electronics collapsed.

Earlier this month, Sony Corp. (ADR: SNE) announced it was cutting 8,000 jobs, or about 4% of its worldwide workforce. Sony recently blamed a 72% profit plunge in the third quarter partially on a resurgent yen. Electronics company Sanyo Electric Co. (OTC: SANYY), facing tough market conditions around the globe, agreed Friday to sell itself to rival Panasonic Corp. (PC).

“Japan’s economy has never weaned itself off of the overbearing reliance on exports, and especially to the U.S.,” said Kirby Daley, senior strategist and head of capital introductions at Newedge Group. “Japan did nothing to prepare itself” for the collapse in demand from abroad, he told Bloomberg News.

Like the U.S. Federal Reserve, The Bank of Japan has been hacking away at interest rates in an attempt to stanch the economic bleeding. Japan’s central bank lowered rates to 0.1% on Friday.  But the rate cuts haven’t been enough to kickstart the Japanese economy, as the yen has remained stubbornly strong.

Source: Toyota’s First Operating Loss Since 1938 Spells Trouble for Japanese Economy

Senior officials say the economy has become much more stable as it has plugged into the booming economies of Asia, exporting everything from consumer goods to machine tools. But not everyone is convinced, with some worried that as Asia slows in response to lower exports to a recession-hit US, Japan’s exports will suffer, as will its consumers, whose spending will be hit by higher fuel prices.

“Japan is cheap in a way that no other developed markets are,” says Merryn Somerset Webb in Money Week.

“A good 50% of Japanese stocks trade at less than their book value (the accounting value of their assets), for example. Dividend payouts are also rising. They have always been stingy, when they have existed at all, but over the past three years, the dividends offered by the biggest companies have been rising at double-digit rates.

“And the economy isn’t doing badly at all. In the fourth quarter of last year, Japan grew at an annualised rate of 3.5% and in the first quarter of this year the numbers are expected to show that it grew at around 2.5%. Given that the best the US can do is 0.6% (and that number is bound to be revised down over the next few months), that looks pretty good.

“Japan is currently the world’s fastest growing developed economy and given its links to Asia (twice as many Japanese exports go to Asia than to the US), it is likely to stay so.”