Japan: A Couple of Observations

Japan appears to have made the same mistake twice now. After demonstrating a willingness to confront China over contested territory, it backed down as China seemed to escalate the issue. In a similar vein, Japan was willing to take on the foreign exchange market by selling JPY2.125 trillion yen (confirmed by the MOF today), which appears to be a record one day amount. Japanese exporters and margin accounts reportedly sold into the dollar's gains the BOJ engineered. But that has been it. Japanese officials appeared to have backed off and one official this week was even talking about the virtues of a strong yen. The dollar fell every day last week against the yen and is now 1 yen lower than it had finished last week.

Yes the intervention was criticized in some quarters, but Japanese officials had to have expected that. Yes the odds of unilateral, even unsterilized, intervention working was also slim, but Japanese officials must have known appreciated that too. Yet they made the judgment call and the lack of follow through can only embolden yen buyers.

On another front, there has been much talk in the US about sin-taxes to raise revenues. Japan has also gone down this route and it may have helped boost economic activity in recent weeks. As of Oct 1, Japan is raising the tax on tobacco by 40%. The hoarding by Japanese smokers ahead of the implementation of the tax may even have boosted GDP. Japan Research Institute says it may add as much as 1.4 percentage points to annualized GDP in the July-Sept quarter.

Press reports indicate that Japan Tobacco, the world's 3rd largest publicly traded cigarette manufacturer, controls 65% of the Japanese market, which is the fourth largest by volume in the world (China, US and Russia are the top 3). Japan Tobacco expects as much as 12 bln cigarettes of additional demand as smokers try to beat the tax. It appears the hoarding began in August as cigarette sales rose 1.9% in Aug from a year ago, the first year-over-year increase in more than 2 years.

The tobacco company estimates that 36.6% of Japanese men smoke and about 12% of women smoke. And the average smoker in Japan appears (2007 estimate) twice what American and Germans smoke and almost 3x more than the ave Swedish smoker.

Back in 2007, when Japan last raised the tobacco tax, there was a similar pattern. The month before it went into effect, tobacco spending jumped 49% only to fall 40% in the month after.

Separately, note the auto purchase subsidy also ended this quarter as the program run out of funds. These might have helped support GDP in the current quarter, but the risk is a dramatic slow down in the last part of the year and this in part was picked up in the Tankan survey expectations component. The BOJ is still widely seen easing policy next week. The focus is on 1) cutting interest paid on reserves, 2) increasing JGB purchases, and/or 3)increasing its lending facilities for longer and with more funds.