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ECONOMY-JAPAN: Hurting From Global Recession

Catherine Makino

TOKYO , Oct 16 2008 (IPS) - Japan’s economy, on an upward trend for several years, has been hit badly by the global credit crisis. As Tokyo stock prices posted its second largest drop on record, anxiety spread of a global recession.

On Thursday, the Nikkei sank 11.4 percent, the biggest slump since October 1987. It came as Japanese Prime Minister Taro Aso reiterated, for the second day, that a 250 billion dollar U.S. bank bailout plan was ‘’insufficient’’.

While European leaders have suggested an emergency G8 summit, Japan, this year’s chair, sounds leery. “A G8 summit should be held only when we are a step away from the worst-case scenario,” Aso told a parliamentary committee on Wednesday.

The G8 is composed of the U.S., Japan, Germany, Britain, France, Italy, Canada and Russia.

Since Oct. 8, when the Tokyo stock market plunged 9.2 percent, analysts here have been talking of the vulnerability of Japan’s economy to export markets and the global recession.

“By definition, exports will be hit as it seems clear that the world economy will be hurt; we’ve already seen the sales of Japanese goods in some key markets (U.S.) go down.’’ Robert Dujarric, an economist with the Temple University’s campus in Tokyo told IPS.’’

‘’As the yen has gone up relative to the US dollar and the euro and even more relative to the South Korean one, that’s further bad news for Japan’s exporters. Overall, Japanese companies are likely to cut down on investment,’’ Dujarric said.

“Car sales are down in most countries, even in the BRIC – Brazil, Russia, India and China – which were until recently doing well despite poor sales in the U.S., EU, and Japan,” said Ed Merner, president of Atlantis Investment Research Corporation Japan. “And the story is the same for other products; Japanese industrial production is down. Countries all over the world are either in a recession or going into a slower period of growth.”

Japanese unemployment is slowly creeping higher, but it remains relatively low. Companies are not hiring many new people, wages are not going up, and most companies are becoming cautious and cutting capital expenses. The yen has moved sharply higher and this is having a negative impact on exports and profits.

The good news is that while the Japanese economy is slowing, there is no banking crisis here and the money markets seem to be functioning, unlike the U.S. and Europe, Merner said. “This could be a chance for Japanese banks and companies to buy up overseas companies at bargain prices,’’ he added.

‘’Assuming the world economy begins to slowly recover sometime next year, the Japanese recession could be mild and by the end of 2009 we could be looking at slowly improving Japanese figures, Merner told IPS.

Andrew Horvat, Japan expert and visiting professor at Tokyo Keizai University, agrees. “We will discover that Japanese companies are much leaner and meaner than their American counterparts. The smallest Toyota car happens to be the most economical to own and it is not by accident that Japan’s Fanuc Ltd., a maker of numerically controlled devices, has 50 percent of world market share.”

The crash was no surprise to Horvat because, he said, the subprime house of cards had to come tumbling down.

‘’Economists have been warning us for years that financial transactions account for 200 times as much capital as actually needed for genuine commercial transactions. And yet, we allowed pension schemes and education funds and contributions to all sorts of public policy institutions to be based on such a fragile, ‘unreal’ industry,’’ said Horvat.

“The crash – because it is a crash – will bring us to our senses and will remind us that there has to be a relationship between productivity and value,’’ Horvat said. “The idea that value consists of what someone is willing to pay for something is a bit too cynical because prices are subject to market psychology which may or may not have anything to do with what a product is actually worth in terms of its value to the economy or to an end user.”

“What this lesson will teach us is that we need safety nets, and we need to finance them with taxes and we need to tax the rich more than the poor.”

The Japanese learned to put value into their products and squeeze value out of every ounce of energy and raw materials that they use for production when they had their bubble 20 years ago. ‘’Sure, there will be casualties. Yamato Life Insurance was one example. But that is because it chose to follow the American model and went long on equities,’’ Horvat said.

Yamato, a nearly century-old midsize insurer, collapsed on Oct. 8 due mainly to plunges in stock prices. It tried to resuscitate its business by gambling on high-risk securities products.

Horvat says Japan will suffer, but it will also be far more familiar with what to do when the bubble bursts than the U.S. or other countries that put their faith in Wall Street pyramid schemes.

Japan will follow the Swedish financial model, according to Steve Church, an economist for Japan Invest. “Japan had a problem with non-performing loans in the 1990s when its bubble burst, applied the Swedish model and handled the problem in three years.”

The Swedish crisis had similar origins to the one in the U.S. The country’s financial deregulation in the 1980s led to a flurry of real estate lending by Swedish banks, which did not worry whether the value of collateral might dry up in tougher times and property prices skyrocket.

When the bubble burst in 1991 and 1992, the government formed an agency to supervise institutions that needed recapitalisation, and another to sell off assets, mainly real estate, that the banks held as collateral.

According to Church, the danger for Japan is ‘’if consumers stop purchasing, that will make the economy weaker’’. ‘’The concern here is that if the economy goes south; there will be negative growth, rising employment while declining exports will lead to lower tax revenues from business and rising social welfare expenditures.’’

‘’Japan can expect to see its growth drop off as its exports decline, leading to lower tax revenue from businesses and individuals, which means social welfare expenditures will rise,’’ said Church.

Japanese who have stocks will cut down on consumption since their financial assets are now worthless, said Dujarric. ‘’So we’re looking at some sort of economic recession. How deep it will be we don’t know, but it will hurt most Japanese.’’