Japan's Inflation, Trade Up

Unlike China, Japan's inflation problem seems eminently manageable, while the current account surplus is also not as concerning as China's growing monster that will top a quarter of a trillion dollars in the year to the end of this month.

Chinese inflation is running at 6.9% at the consumer level, with non-food inflation at 1.4%, up from 0.9% in the middle of the year.

Yesterday Japan revealed that wholesale inflation was boosted sharply to a 14-month high in November by the rising cost of oil and oil products.

Wholesale prices were up 2.3% from November 2006, compared to the 2% rate in October, according to the Bank of Japan.

That was above a market consensus of 2.1%.

In China, fuel costs were 22% higher in November compared to November 2006, and that seems to have been a major factor in driving up non food costs, while food costs rose 18% in the month.

Japan's current-account surplus increased for the 10th month in a row in October thanks to solid exports to Asia and Europe and growing earnings from overseas assets. They are the result of the much talked about 'carry trade'.

The surplus jumped almost 46% $US20.1 billion from November 2006, according to figures from the Japanese Finance Ministry.

The improving level of exports to China and Europe are making up for a slowdown in exports to the US where the subprime mortgage mess and housing slump, plus falling demand for cars and other consumer goods, is hurting sales.

The Finance Ministry said exports grew 13.7% in October from a year earlier to notch up the second highest figure on record. Imports rose 8.3%.

The income surplus, the difference between money earned abroad and payments made to foreign investors in Japan, rose 17.4%.

Meanwhile more figures released in China yesterday that highlight the strength of the boom, but also give rise for concern about next year.

According to figures reported by Bloomberg and Reuters, China's retail sales last month rose at the quickest pace in at least eight years.

Analysts say the outcome helps the government efforts to curb the economy's dependence on exports and investment for growth.

But rising retail sales also show the overheating nature of the economy and the curse of inflation because estimates are that much of the near 19% growth in retail sales was made up by higher prices.

Sales climbed 18.8% to around $US110 billion in November from a year earlier, the Chinese National Statistics Bureau said yesterday.

That was after an 18.1% rise in October. It was the largest rise yet recorded in China in eight years of issuing these figures.

Household spending accounts for around 36% of China's gross domestic product compared with more than well over 50% in the US and Japan and Europe.

For the first 11 months of the year, retail sales were up 16.4% from the same period of 2006.

But if inflation is touching 7% (and 22% for fuel) then much of the headline figure in growth for retail sales is attributable price inflation.,

In many respects there's little or no significant improvement in volume of goods sold, except for cars and consumer items.

Food accounts for a large part of retail sales: around a third by some estimates. That means a 58% rise in the cost of pork from November 2006 to November 2007 not only makes a hole in household budgets, but drives headline sales figures, for no apparent gain in higher volumes.

Spending on meat, poultry and eggs jumped 45% in November from a year earlier while for grains and edible oils, the gain was 48%. Spending on petroleum products climbed 22%.

That's why price controls have been introduced by the central government to try and keep down any social unrest caused by the sharp rise in food prices.

That's why the apparently strong retail sales figures are cause for concern: domestic consumption is not being stimulated by higher food prices because of the price contrails. If the price controls were to be lifted there might be a faster rise in output. but much of the problem with pork supplies are due to illness in swine herds and that will take months to fix up and rebuild output.

Edible oil prices are being driven higher by high world prices caused by: a shortage, rising Chinese demand, and competition from biofuels for canola and palm oil.

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