All material subject to strictly enforced copyright laws. © 2021 Euromoney Institutional Investor PLC group
Emerging Markets

Lost in trepidation

Japan’s economy risks another lost decade as its exports collapse. Only a fundamental rebalancing of the economy can dull the pain

For a nation that entered the global economic crisis looking in better shape than its peers, Japan’s rapid and dramatic fall from grace has been little short of astonishing. The consensus forecast now is that Japanese real gross domestic product (GDP) will contract by 5–6% this year – a far more severe collapse than that predicted for the US or for European economies, and perhaps the worst in Asia too.

With its banking system less exposed to losses from the subprime crisis than those of the US, Britain and others, Japan appeared likely at first to survive the ensuing economic mayhem. But once the financial crisis translated into a trade shock, Japan’s exports collapsed while industrial production imploded, investment plunged, employment sank, the trade surplus disappeared and business and consumer confidence melted away.

The speed of the downturn was stunning as Japan’s economy plunged into what prime minister Taro Aso calls a “once in a century” crisis. What had been a measured drop in exports until late last year suddenly turned into a rout as they crashed by 50% in February from their level a year earlier, while Japan suffered a trade and current account deficit for the first time in decades.

Industrial production plunged by 38% in February from its year-earlier level while corporate capital spending plans were slashed and consumer spending slumped. By March, business confidence in Japan was falling at its fastest pace on record – to a record low. Japan was declared officially back in deflation with wholesale and consumer prices falling.

GDP contracted by 12.1% on an annual basis in the final quarter of 2008 and probably suffered an equal fall in the first quarter of this year. Forecasters are meanwhile competing to give the direst prediction for 2009 as a whole. The Asian Development Bank says Japan’s GDP is likely to contract by 3.5% this year while the World Bank says 5.3% and the IMF 5.8%. The OECD puts the likely shrinkage at over 6%.

Potent mix

What went wrong involves a complex cocktail of factors – overdependence on relatively few export markets exacerbated by a sudden wrenching surge in the value of the yen, a failure by corporate Japan to boost wages in the past to underpin consumption, and the failure of government to provide the safety nets that could encourage its people to consume more. A politically weak and heavily indebted government has made matters even worse.

It will take “two to three years” for Japan to recover from its sudden collapse, acknowledges Yasuo Hayashi, chairman and chief executive of the Japan External Trade Organization (Jetro) – on the view that the economy is suffering essentially from a cyclical downturn. Others say that the problem is structural and not just cyclical, however, and that Japan’s economy will not recover without fundamental re-engineering.

What is needed to put things right is “a paradigm shift in terms of policy planning and implementation,” says Eisuke Sakakibara, former vice finance minister for international affairs, who is widely tipped to become Japan’s next finance minister in the event that the opposition Democratic Party of Japan comes to power. And, “there will be a change of government by September [when elections are due],” he tells Emerging Markets.

Economic stimulus

For now, Aso – Japan’s third prime minister in the space of as many years – is hanging onto power despite his very low popularity ratings, and is throwing a lot of public money at the crisis, in the hope that his political fortunes as well as the embattled nation’s economic fortunes will improve before the elections are held. In early April, Aso ordered a further 15.4 trillion yen ($154 billion) of stimulus, worth 3% of GDP, on top of the 12 trillion yen committed earlier.

“A significant boost to demand [in Japan] is approaching” as a result, says chief economist Richard Jerram at Macquarie Securities in Tokyo. Scenting a whiff of recovery (as yet unconfirmed by hard statistics), Tokyo’s benchmark Nikkei 225 stock average began lifting from a decades-long low of near 7,000 after the latest fiscal package was announced on April 9, and hit what is regarded as a psychologically important level of 9,000.

Changing the focus

But Japan cannot hope to achieve sustainable economic recovery without fundamental rebalancing of the economy away from its extreme dependence upon exports towards greater domestic demand, says Sakakibara. Simply throwing money at the problem – for example, by making cash handouts to the Japanese public at large, as Aso has insisted upon doing (with one eye toward the upcoming election) – will not work, he adds.

“I favour a Japanese version of the Obama ‘Green New Deal’,” says Sakakibara, who still enjoys international renown from his days as Japan’s “Mr Yen” (so called because of his frequent verbal intervention in foreign exchange markets). “Rather than giving handouts or tax cuts or orthodox public works, we should promote clean energy by giving subsidies to solar power and windmill generation.”

Japan also needs “to give lots of subsidies to agriculture”, he argues. “Japan’s food self-sufficiency ratio is now 40%. That could be increased to 60% by deregulating parts of agriculture and letting private companies go in.” Both of these policy actions would contribute significantly to the revitalizing of Japan’s local communities – “and that is absolutely essential at this moment”.

Sakakibara’s ideas reflect those of the main opposition Democratic Party led by Ichiro Ozawa, whom he advises. The ruling Liberal Democratic Party appears to have taken some of these ideas on board, and current finance minister Hiroshi Yosano (who also doubles as minister for economic and fiscal affairs) included certain Green New Deal-type measures in the early April stimulus package.

Other steps are aimed at boosting discretionary consumer spending. “Car sales, housing starts and department store sales have all collapsed as a result of a rising savings rate, as Japanese consumers panic over job security,” says Macquarie’s Jerram. Yosano’s package should help by providing a stronger unemployment safety net, financing for firms to reduce bankruptcy risk, tax incentives for some products and a larger gift tax allowance, he adds.

But Japan Trades Union Confederation president Tsuyoshi Takagi says there is no way Japanese workers can increase consumption until wages are raised.

At best, fiscal stimulus in Japan is likely to arrest GDP decline by two percentage points, economists say – so the drop in output looks like being severe whatever is done.


We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree