Japan’s Banknotes Get a Makeover

The Days Ahead:

• Retail sales and housing starts.

This Week:

• New bank notes in Japan.
• Cash is widely popular.
• Vending machines sell over $60 billion annually…
• The cost of updating machines means many will promote credit card use…
• It’s another way to encourage consumer spending.
• The U.K. elections went calmly and there’s a new economic mandate.
• The French election result was unexpected and the drama isn’t over.
• We take a closer look at the employment report: steady but slowing.

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Japan’s New Banknotes

Normally new bank notes aren’t newsworthy. The U.S., after all, has not changed the faces on any bills in over a century although there are regular updates to prevent counterfeits. Japan, however, has changed its note designs 53 times in the last 100 years. On July 3^rd 2024, it introduced three new ones and with the newly designed notes, we may see welcome changes in consumer spending and savings.

First up, here’s the new ¥5000 (about $32) note:

There’s also a new ¥10,000 and ¥1,000 note, all of which have anti-counterfeiting technology like holograms and UV sensors. The portraits chosen include Tsuda Umeko on the ¥5,000 note (pictured) who went to Bryn Mawr in the 1890s and founded the first women’s university in Japan. The other two portraits are of industrialist Shibuwasa Eiichi, who founded the stock exchange and dozens of Japanese companies like Sapporo and Kirin breweries, Tokyo Gas, and Mizuho Bank, and Kitasato Shibasaburō, a pioneering immunologist. They’re the first fully 20^th century people depicted on Japanese bank notes and join Alan Turing and Winston Churchill as the only 20^th century figures on any notes printed in the U.S. the European Union, Switzerland, and China.

One other change is the prominent use of Arabic numerals instead of kanji characters.

It’s all a nice touch of modernity.

Cash has a special place in Japan. Cash in circulation is around 6% of GDP, about the same as the U.S. except that half of all U.S. cash is held overseas, so the U.S. effective rate is around 3.5%.

Cashless transactions are 40% of all transactions in Japan compared to 82% in the U.S. They’ve grown 50% since Covid-19 but credit and debit card usage is low and growth is around 11% a year. Credit cards make up 84% of all cashless transactions, with the rest from debit cards, at a value of $700 billion. In the U.S. it’s over $14,000 billion and growing about 30% a year.

There are 124,000 ATMs in Japan or 112 for every 100,000 adults against a world average of 39 and the U.S. of 173. In Japan retail cash deposits are 172% of GDP compared to 67% in the U.S.

Japanese people use a lot of vending machines. Sure, these take credit cards but most purchases are with cash. There are 5.5 million in the country, and while that’s less than the U.S.’ 7 million it’s 4,400 per 100,000 compared to 2,000 in the U.S.

In Japan, vending machines account for $60 billion in sales. In the U.S. it’s $6 billion. Most U.S. vending machines are indoors, thus limiting access. Japanese vending machines are ubiquitous, offer a wide range of products and are outside. Products include bicycle parts, insects, clothing, as well as hot food, drinks, alcohol, cigarettes, entire restaurant menus and bee larvae (tastes like “fatty honey”).

That’s all good except retrieving cash from vending machines is labor intensive and companies would like consumers to move to credit card use.

Finally, people hoard cash. Households store over $500 billion in cash at home with another $6,500 billion held at banks. That’s $9,000 per household compared to $300 in the U.S. Hoarding made sense when Japanese banks paid zero interest for 20 years which, with the added insult of withdrawal, deposit and transfer fees meant savers received negative rates. Cash at home was a better investment than any bank could provide. Low crime rates also mitigate the risk of holding cash.

Add it all up and we see a cash-rich society, used to buying at vending machines and other easy to use outlets, and with a slow adoption of credit. Meanwhile, the Bank of Japan is eager to see inflation and wages rise and remain up and the government wants to encourage more consumption and credit use.

How will the new notes help? First, vending machine operators face a high cost to convert machines to the new notes. Only 30% of all machines are ready for the new notes. It costs $3,000 to recalibrate a machine and many will forgo the updates, increasing credit cards use.

Second, in the past, holders of old notes exchanged them for new ones. This time, savers may start to use alternatives for cash such as more attractive bank deposits and a highly favorable personal share savings program which waives dividend income and capital gains taxes. It’s hoped that when people exchange old bills, the new savings programs will appear far more attractive than mattress cash.

Third, restaurant owners face large bills to update machines and many have already announced they will raise prices for customers not using credit cards.

The new notes could accelerate the move away from cash. That will save vendors and service providers money. It should also help the move to cashless transactions which benefit both consumers and merchants because the average value of a credit card transaction is higher than a cash transaction. It’s another small way that Japan is emerging from decades long stagnation. It would be a nice touch if newly designed bank notes help it along the way.

Two Elections Done

The results of the U.K. and French elections are in and markets barely reacted.

In the U.K., the Labour party won 34% of the vote but in a “landslide” victory won an outright Parliamentary majority with 64% of the seats. In France, the right wing Rassemblement National (RN) party, won 37% of the votes but only 24% of the parliamentary seats. The result was a swift reversal of the right’s success in the EU elections where RN won 32% of the vote, twice the votes of the next party.

The two parties won around the same level of the popular vote but with wildly different outcomes. The quick explanation is in the system. In the U.K. people vote for a Member of Parliament in a single “first past the post” round. A Labour candidate may win by one vote in a 100,000 person constituency and will then take her seat in Parliament. If the other 649 seats go the same way, the popular vote may be small but the party will have an overwhelming majority.

In France, the election is in two rounds. The first round saw the RN win 33% of the seats but that set the second round up as a three-way race between the RN candidate, the NFP (a left coalition of six parties) or Ensemble (a centrist coalition of five) candidate. In a classic move of tactical voting, the centrist and leftist parties withdrew one of their candidates so every seat became a two-person race. The result was that the two parties out maneuvered the RN, winning 60% of the seats. President Macron must now appoint a Prime Minister from one of the two parties, mostly likely the NFP, and start work.

The U.K. election threw out historic results. The Tory and Labour parties won 58% of the votes between them, down from 67% in the last election and 80% in the mid 1980s. Four smaller parties won 36% of the vote. As in France, parties and voters splintered into smaller and smaller groups.

The U.K.’s Labour party has carried the confidence of the markets. Sterling, gilts (U.K. government bonds) and stocks all rallied, mostly, on the hope that the long-drawn-out economic decline from Brexit would at least be arrested, if not reversed. U.K. stocks trade at a near record 45% discount to the S&P 500 so bargain hunters may come around. The new Chancellor of the Exchequer, Rachel Reeves, is a safe pair of hands, and has already started to rebuild bridges with the EU.

France is more complicated. If President Macron called the election to confirm his control over the middle ground, he failed. He must now either

1. Work with a NFP parliament and prime minister whose policies undo his reforms, or…
2. The above, but hope the NFP moves into the center or…
3. Hope that some of the NFP parties splinter off and join him in a centrist coalition

What is certain is that some of the more extreme positions put out by the NFP, such as lowering the retirement age, a wealth tax, a 90% marginal tax on income above €400,000, raising the minimum wage by 14%, freezing all food and energy costs and limiting inheritances, have almost no chance of becoming law.

Why? It’s because of this:

The graph shows the ratio of government debt to GDP in both the U.K. (in green) and France (in blue). Both are around 112% of GDP and markets will not allow further slippage. Neither has room for fiscal expansion. France is under a EU directive to reduce its deficit of 5.5% to 3.0% and its debt from 111% to 60%. It has until September 20^th to come up with a plan. Of course, the French government could ignore the directive, but the bond markets will kick back. French bonds already trade 0.6% above their German counterparts. If they start to widen out, France could quickly find itself with a market rout on its hands.

We’d expect the situation in France to resolve itself although the tradeoffs between the President and the NFP may lead to unwelcome headlines in coming weeks. The U.K. though, has become boring again. And that’s a good thing.

The Jobs Report

The headline numbers in last week’s jobs report were good enough at 206,000 but the BLS revised the previous two months down from 447,000 to 320,000. Some 70,000 of the new jobs were in the government sector and the three-month average of private payrolls slipped to 146,000 down from 247,000 a year ago. We’d make three observations.

First, new jobs less healthcare, education and part-time work are clearly slowing. We take those jobs out because both healthcare and education jobs, notably in state and local government, are still recovering their pre-Covid-19 trend. They’re real jobs of course, but they’re not as tied to the business cycle as other jobs. This is what the trends looks like.

Second the Sahm rule, which says that if the 3-month moving average of unemployment is 0.5% above the 3-month moving average low of the last 12 months, then we’re in a recession. The 3-month average is 4.00% and the low, from last June, is 3.57%. The difference is 0.43% not 0.50%, so the Sahm Rule is not triggered. It will if next month’s unemployment rate is 4.1% but as ex-Fed economist Claudia Sahm has said, that’s no cause for alarm.

Third, the labor force grew by 277,000 while the number of unemployed grew 162,000. There’s a big difference between the unemployment rate rising because people are losing jobs versus it rising due to a growth in the supply of labor. Immigration has driven some of that increase. The foreign-born working population has grown by over one million in the last year and is now 19% of the workforce compared to the post Covid-19 low of 16%.

Bottom Line

Chair Powell’s testimony to Congress barely moved the needle in bond or stock markets. He mentioned that inflation has eased but that it’s not yet at the 2% goal….which is pretty much what he’s  been saying for a year. He made more comments on the labor market than he has done for a while. In March 2023 he said the labor market was “extremely tight.” In March of this year, that it was “tight” Now it’s “cooling.”

The 10-year Treasury traded between 4.27% and 4.33%, which is a very tight range. The Treasury auctions went well. Foreign buyers and real investors, as opposed to dealers, bought at the highest level in a year. On Thursday, however, a good inflation report sent the 10-year Treasury to 4.17%, its lowest since the inflation scares in March.

Stocks reached a record high on Thursday and are up 18% since January. Markets now expect the Fed to start cuts in September.

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Art of the Week: Natalia Goncharova (1881-1962)

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