Fourth quarter Japanese gross domestic product (GDP) growth was double the forecasts, but Western analysts remain negative. The Tokyo stock market seems to confirm their gloomy views. However, the Bank of Japan did not cut its uncollateralized overnight call rate and kept it unchanged at 0.5% at its meeting on 15 February. The central bank said Japan’s economy continues to expand moderately, with less inflation risk than elsewhere. With stocks hammered and sentiment negative, Japan may actually provide a safe haven.
As in the US, the housing sector has hurt Japan’s GDP. Housing starts, which is the number of privately owned new homes, peaked in 2006 at 1.29 million, then dropped sharply after the land ministry introduced stricter building codes last June. By September, starts were 44% below the year-earlier period, but they subsequently recovered to a December figure only 19% down. Overall, last year, housing starts were the lowest since 1967.
Any resemblance between the housing situations in Japan and the US is superficial. Even including housing, Japanese GDP was up 3.7% in the fourth quarter of 2007 and 2% for the year—faster per capita growth than the 2.5% in the US.
There is no housing finance bust; that happened 15 years ago after the Japanese bubble burst. The new building codes were relaxed in November and housing starts are recovering. Housing is thus unlikely to drag down 2008 GDP.
The Bank of Japan’s forecast of continued moderate growth seems reasonable even though exports may be affected by the higher yen and possible global slowdown. The Japanese budget deficit has been brought down below that of the US, Britain or France. Inflation is positive but small, the ideal position. The Japanese stock market is far gloomier than the economic outlook warrants, according to analysts. Its 23% decline in the past year compares with a 7% drop in the S&P 500. Traders appear to assume the imminent return of the stagnation of 1990-2003, rather than recognizing that Japan is five years into recovery.
For believers in modern financial theory, the market is never wrong. But given the losses modern financial theories have produced over the past six months, a cynic might take the contrarian approach and see Japan as a safe haven in a difficult world.
Daimler looks set for cruising speed
Daimler AG is accelerating. The German maker of Mercedes luxury cars reported on Thursday that 2007 net income rose to €1.7 billion (Rs9,860 crore), a dramatic turnaround from a small loss in the previous year.
Dumping troubled Chrysler Llc. looks like a smart move, allowing the Stuttgart-based company to focus on high-profit luxury vehicles. The combination of job cuts—Mercedes has slashed 9,700 factory jobs since 2005, reducing costs by €7.1 billion—plus the launch of popular new models led by the revamped C class have pushed the company’s sales and all-important car margins up to an enviable 9.1% last year.
Mercedes is speeding past its historical German luxury car rival BMW AG. The Munich-based competitor is launching its own cost-cutting programme and its margins hover at just over 6%. (In comparison, mass market carmakers such as Renault SA enjoy margins lower than 4%.) BMW only reports earnings in March, but its sales fell by 1.6% in the first month of this year, while Mercedes sales soared by 16%. BMW also is more exposed than Mercedes to the slowing US market—it gets about a quarter of its sales there, while Mercedes makes less than a fifth.
To be sure, Daimler still must drive around obstacles. Like BMW, it faces the prospect of heavy spending to clean up its large, heavy polluting cars to meet impending new European emissions controls. And unlike BMW, Daimler has a troubled truck division that suffered a 40% plunge in heavy truck sales in North America in 2007. But these issues look manageable. Daimler truck sales rose 29% in Brazil, Russia, India and China last year, offsetting most of the US slump. The Mercedes car business is benefiting from a similar boost in demand in emerging countries.
Even if there is a US recession, Daimler remains optimistic that, as after the dotcom bubble burst, sales of premium cars will withstand the downturn better than the mass market brands. It expects global sales of Mercedes cars to rise this year. Daimler’s guidance for the coming year looks cautious. Unless the market collapses, it could raise margins to 10%, a year earlier than scheduled. Daimler looks like it is ready to move into a higher gear. William Echikson