Yen Depreciation Increases Import Prices; Particularly Energy

Core machinery orders plummeted by 13.1%. This is likely a statistical blip, probably caused by bad weather rather than a trend reversal. Domestic orders should increase in the coming months on the improved export outlook and increased government spending.

Machinery orders were surprisingly weak in January. Total orders fell by 3% and core orders — i.e. excluding those for ships and from electric power companies — plummeted by 13.1%. The latter is now at its lowest level since June 2010. This might be a bad omen as it is a leading indicator for private investment.

Today’s weak data are likely a statistical blip rather than a trend reversal, probably caused by bad weather. In general, enterprises continue to signal improving business conditions thanks to the depreciation of the yen and the prospects of increased government spending.
Moreover, the weaker yen may also have slowed the offshoring of manufacturing activities.The Cabinet Office’s leading indicator gained almost three points in January, and was at its highest level since February 2008. The current conditions index of the Economy Watchers Survey reached its highest level since April 2006.

On the downside, the depreciation of the currency has increased import prices in particular for energy. Since the disaster at the Fukushima Daiichi nuclear power plant — exactly two years ago — Japan closed down all its nuclear power plants. Only two resumed activity in 2012. This has resulted in increased imports of fossil fuels, and a considerable worsening of the trade balance. The Abe government is considered to be more favourable to the nuclear industry than the previous Noda administration. The restarting of the nuclear reactors is rather controversial. After the Upper House election in July, the government is likely to increase the pressure on the local prefectures to re-open nuclear power stations. This should support activity through the removal of electricity supply restraints and lower electricity prices.

BY Raymond VAN DER PUTTEN

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