Unmade in Japan


By Jon Nadler

Jan 23 2009 4:28PM


Good Afternoon,

Gold prices vaulted above the $900 mark for a brief period on Friday, in a culmination of their recent disconnect from the US dollar. The metal recorded solid gains on the order of 5% for the day, and was last seen at $899 per ounce, with more than 90 minutes to go in afternoon electronic trading. Momentum traders made a return to the bullion market on Friday, and their sizeable footprints were also visible in the copper, crude oil and other commodities. In part, this was seen as a case of the lack of alternatives for the piles of sidelined cash. In other respects, with stories of bank nationalizations and imploding equity markets (at least in the early part of the trading day), investors wanted to crowd under the golden umbrella and seek protection from stormy financial seas.

In the case of copper, an earthquake in Chile also contributed to gains - the country being the largest supplier of the industrial metal. Much of the action today was also a result of the troubles over in the UK and Europe, where gold touched record price levels in pound and euro terms. Whatever the surge was, it certainly was not 'whacked' by sinister forces waiting to pounce on  it. Where were the manipulators today? Oh, they must be on their way to Davos. A close above the round figure would put the metal back into territory it has not seen since early October, and very near to the level from which it last failed, on its eventual way to the low $700s just two weeks after that.

Silver gained half a dollar, rising to $11.89 as it joined the commodities party in New York today. Platinum and palladium also recorded handsome gains on the day, the former rising $29 to $951 and the latter climbing $10 to $193 per ounce. Although automotive sector woes are far from being over, South African production difficulties and the generally favorable speculative commodity sentiment seen today, motivated takers of fresh positions. Pre-weekend profit-taking thus turned into pre-weekend short-covering in certain metals pits.

Next week brings a full party platter of events and data to the market tables. First off, the World Economic Forum being held in Davos, Switzerland. By midweek, we should have some communiques from the summit. Top-priority reading, those. The Chinese New Year will have parts of Asian trading and investment communities on hiatus, as they usher in the Year of the Ox. In this morning's comment we brought you the expectations of those who read the stars as regards markets for 2009.

Now, for the closing update, we focus on Japan and its importance to the US-Japan-China trinity as regards the global economic outlook. The way things are going (you heard it this very morning from UK PM Gordon Brown) the interconnected world cannot spring back to health without some critical components having been healed first. Japan is of prime importance to the equation. This time, the observations of Nouriel Roubini - who is far from being an astrologer- have been weighed by Bloomberg's William Pesek. He finds that:

"The global crisis blindsided most Japanese executives and politicians. Much of the chatter in 2008 was about how Japan’s cash-rich banks would play a white-knight role for a Wall Street in turmoil. Mitsubishi UFJ Financial Group Inc.’s $9 billion investment in Morgan Stanley was seen as the first of many such deals.

As 2009 unfolds, the folly of that view will come into sharper focus. Yes, Japan’s government has the resources and borrowing potential to forestall a meltdown. The roughly $15 trillion of household savings is a comforting counterpoint to press reports of rising Japanese poverty and homelessness.

Yet Japan will have the same problem as China this year. Both economies can hold their ground when others are booming. With the U.S and Europe in deepening recessions, all that’s left is domestic stimulus. That goes for Asia, too. Singapore may contract a record 5 percent this year. In South Korea, industrial production fell by the most on record in November. Officials in Indonesia, Malaysia, the Philippines, Taiwan and Thailand are struggling to boost slowing economic growth.

Lost Decade

No serious economist thinks Japan is going to crash. Yet the odds of another 1990s-like period of negligible growth and deflation are increasing as economies such as the U.S. risk a similar fate. Minimal household savings, sliding home prices and dwindling retirement accounts leave Americans with one option: thrift. The specter of Americans consuming less is prompting a rapid reassessment of Japan’s prospects.

“We’d better get ready for a three-year recession,” says Hiroshi Yoshikawa, head of the government committee that charts economic cycles. The decline “will be very severe, not only in terms of duration but also depth.”

Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo, headlined a Jan. 20 report: “Panic on Jobs.” Yesterday’s was called “Unprecedented Contraction,” arguing that the speed of declines in exports and production “is more than twice as fast as anything on record.”

Roubini in 1996

Such trends are engendering the kind of gloom envisioned by market seers such as Nouriel Roubini. The views of the chairman of Roubini Global Economics LLC in New York are worth considering. That goes both for what he’s saying now -- that Japan is in for a severe recession -- and more than decade ago. In November 1996, Roubini delivered a speech in Tokyo titled “Japan’s Economic Crisis.” What is striking when reading Roubini’s remarks then is how, with a few changes here and there, many of them are just as relevant in January 2009.

“The different social culture and history of Japan suggest that Japan will not and should not follow the brutal ‘Wild-West’ American model of restructuring and reform,” Roubini said. “However, there is need in Japan for major structural reforms and economic deregulation in order to foster entrepreneurship, risk-taking, innovation and long-run growth.”

Fast Action

Roubini added that “delaying these reforms will not help because short-run reduction of the pain might lead to more serious problems in the long-run.”

Prescient words. Because Japan did delay much-needed economic changes, it’s now in a very bad way. The Bank of Japan has already failed to boost growth by cutting interest rates to zero. Japan has already tried, and failed, to create a thriving domestic economy with massive public spending. The BOJ and the government will pull out all the stops to keep a recession from becoming a depression. Wealthy Japan is far better positioned to stay out of the abyss than peers in Asia. Yet Japan won’t be making the changes needed to prepare for a rapidly aging population and or help it to thrive in a region in which its standard of living is too high to compete.

Unless officials in Tokyo act fast and furiously, Japan risks another lost decade. Or something even worse."

We are now on our way to the Cambridge House show in Vancouver, where we hope you will join us and learn what may be in store for metals and mining shares in this Year of the Ox. Happy New Year to all of our Chinese readers, media friends, clients, and to our dedicated staff in Kitco's Hong Kong and Shanghai offices!

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal


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