Let’s take a look at some current economic reports about Japan.

Hemscott is reporting Japan monetary base falls for 10th straight month in Dec

TOKYO (XFN-ASIA) – Japan’s monetary base fell for the 10th consecutive month in December when it dropped by 20.0 pct from a year earlier to 90.466 trln yen, preliminary data from the Bank of Japan showed. The year-on-year fall last month was the fifth steepest on record, and smaller than the record 22.3 pct drop in November.

The monetary base dropped in March last year for the first time in more than five years following an end to the central bank’s easy credit policy and it has been shrinking since then as the central bank was steadily draining surplus funds in short-term money markets.

On March 9 last year, the BoJ ended a five-year-old super-loose monetary policy under which it flooded the short-term money market with excess cash to keep short-term interest rates near zero in a bid to defeat deflation.

Obviously “flooding the short-term money market with excess cash to keep short-term interest rates near zero in a bid to defeat deflation” was a totally failed policy. Yet for some reason people think it will have a different effect here if and when we get to the same point.

Japan Today is reporting Japanese bank lending posts 1st rise in 10 years

TOKYO — The average daily balance of Japanese bank lending expanded 1.2% from a year earlier to 384.86 trillion yen in 2006, the first rise in 10 years, the Bank of Japan said Friday.

After adjustment for special factors, the loan balance rose 2.1% in 2006, posting its first gain since the central bank made year-on-year data available for comparison in 1999.

This rise in credit (lending) is a very significant event. Unless it is an outlier, Japan’s deflation is over.

The Japan Times is reporting Japan’s savings rate hit a record low 3.1% in fiscal 2005.

Saturday, Jan. 13, 2007
Japan’s savings rate in fiscal 2005 fell for the eighth straight year to a record-low 3.1 percent, the Cabinet Office said Friday, indicating growth in household income is slow and senior citizens are dipping into their savings.

The savings rate, or the share of savings as a percentage of total household disposable income, in the year to last March dropped by 0.3 percentage point from the previous year.

The fiscal 2005 rate, the lowest since the government began to compile savings data in 1955, was less than one-seventh of the peak of 23.1 percent posted in 1975.

The Japanese savings rate is expected to fall further as baby boomers reach retirement age in the coming years and more people start to live off their savings.

The Cabinet Office also said Japan’s fiscal 2005 national income, which includes employee and corporate income, increased 1.3 percent from the previous year to 367.6 trillion yen, marking the third straight year of growth.

This is particularly interesting. The much ballyhooed Japanese saver is now saving a record low 3.1%. In Q&A; on the Psychology of Deflation I stated:

When it comes to spending one also has to remember that it was not that long ago that the savings rate in the US was 8%. That savings rate steadily declined to the point where it went negative for 18 consecutive months. What can not continue will not continue by definition. A negative savings rate can not continue forever. There will be a trend reversal in the US back towards the norm on savings and sooner or later a trend reversal back towards spending in Japan. After a 20 year bout with deflation in Japan it is too easy to say they are a nation of savers. Likewise after a massive 20 year spending spree in the US it is easy to project that trend forever into the future. Neither trend can last forever.

With Japan’s enormous national debt, interest rates poised to rise, and Japanese savers no longer saving at a massive rate, it will be interesting to watch the Yen.

Bloomberg is reporting Japan’s Producer Prices Rise at Slowest Pace in Year

Jan. 16 (Bloomberg) — Japan’s producer prices rose at the slowest pace in a year in December as oil costs fell, easing pressure on companies to pass expenses on to consumers.

Thirty-four straight months of rising producer prices haven’t spurred inflation, undermining the Bank of Japan’s case that interest rates, the lowest among major economies, should be increased. Central bank Governor Toshihiko Fukui and his policy board will begin a two-day meeting tomorrow to decide whether to raise the key overnight lending rate from 0.25 percent.

Thirty-four straight months of rising producer prices haven’t spurred inflation because inflation is not about prices at all, especially producer prices. Inflation is about expanding credit. But we have seen a significant inflationary shift with bank lending rising in conjunction with a decrease in the savings rate.

Reuters is reporting BOJ unlikely to raise rates this week.

TOKYO, Jan 16 (Reuters) – The Bank of Japan is unlikely to raise interest rates this week as central bankers felt it was necessary to monitor further whether consumer prices and spending were picking up enough, media reports said on Tuesday.

The reports caught off guard investors who had thought a BOJ rate increase to 0.5 percent was a done deal. These expectations had grown after a number of earlier Japanese newspaper reports saying such a move was coming at a two-day BOJ policy meeting ending on Thursday.

The turnabout came just as Japan’s finance minister signaled that the government would not try to block a possible credit tightening this week, stoking expectations that the BOJ would raise interest rates to the highest level since 1995.

“We should continue to monitor (personal consumption and consumer prices) to confirm the spillover effect on the household sector” from the strong corporate sector, Kyodo quoted a BOJ source as saying.

This focus on prices is going to cause Japan lots of grief. In fact, it already has. People will spend when they are willing and able and not before. Businesses will borrow and banks will lend when they are both willing and able and not before. Thus a rise in bank lending for the first time in ten years is quite significant. We will find out soon enough if Japan hikes, but even if so, a .50% rate can hardly be considered restrictive in the face of a pickup in credit.

Perhaps Japan will be shocked out of their complacency by a severe plunge in the Yen. This of course is exactly the opposite of what nearly everyone (especially dollar bears) expects to happen. Should a collapse in the Yen force an unexpected series of hikes in Japan, an enormous whipsaw in the Yen and the carry trade is likely.

Mike Shedlock / Mish/