A few weeks ago, my Asia Times
Online colleague Spengler (channeled by David P
Goldman) wrote a missive on the eve of the US
elections entitled "Barack Obama and
America's Decline" (Asia Times Online,
November 6, 2012), which included a plaintive plea
for voters to cast their ballots on issues over
and above their narrow personal interests.
Predictably, my cynical response to him was on the
lines of "why would turkeys vote FOR
Thanksgiving?"; this being a family publication I
shall not delve on his response to that missive.
As it turned out, the turkeys did vote
against thanksgiving, and Obama is back in the
White House to give Keynesian policies another
shot. Specifically, the arguments that will be
aired in the next few weeks and months will echo
those of Professor Paul
Krugman, who has himself
filched a lot of ideas from the work of Professor
Richard Koo and his book, the very modestly titled
The Holy Grail of Macroeconomics" which I
have reviewed in this column many moons ago. (See
We
are all Japanese now, Asia Times Online,
September 5, 2009.)
The central thesis of
the book is that Japan failed to enact appropriate
monetary and fiscal easing to counter the collapse
in leverage engendered in the household and
corporate sectors after the collapse of the
economy in the late eighties and early nineties.
Since the late '90s though, Japan's government has
run a series of deficits while the central bank
has kept interest rates at below zero through the
liberal use of quantitative easing measures.
In fits and starts, the strategy has
allowed Japan to remain afloat; however as the
most recent trade deficit numbers make clear last
week (a horrifying collapse in exports) and the
travails of electronics giants Sony and Panasonic
(both downgraded to junk credit rating last week
by the Fitch agency), the path is nowhere near
smooth; and indeed results appear to run counter
to the best intentions of both Koo and by
extension, Krugman.
At many levels, I have
a deep admiration for the Japanese people; their
work ethic, aesthetic values and personal
discipline all set them apart from the globalized
mainstream. Equally, a lot of people have called
the death of Japan already; somehow the old lady
didn't notice those obituaries and has continued
to plod on despite all the deprivations that two
decades of economic recession bring. A cat with
the proverbial nine lives, in some ways.
Economics though is an unforgiving
taskmaster, and eventually extracts change from
the most obdurate societies. There are in
particular a few specific factors that argue that
the cat's nine lives are indeed up this time
around.
Exacerbating the current situation
in Japan is the collapse in the political system
where, yet again, a coalition government is set to
fail and new elections announced in December.
Alternatively one could argue that political
paralysis, much like in the case of the US and
Europe's lame duck governments, is merely the
populist rendition of a sclerotic economy. The
reason for the linkage of course is that the Japan
is the living (ahem, some may argue that point)
embodiment of the situation where the turkeys not
only outvoted thanksgiving, they also allocated
all the gravy to themselves.
The Liberal
Democratic Party (LDP) has done all the usual
gimmicks - promises of more subsidies, the vaguely
worded reforms and of course obligatory visits to
the Yasukuni shrine designed to get geriatric
Samurai warrior votes on its side; with the active
support of the farming and construction lobbies it
appears that the LDP is headed back to power
albeit in a coalition framework.
We do not
know yet how the incumbent Democratic Party of
Japan is likely to fare, so convoluted are the
fortunes of the party when examined against the
popularity of its individual politicians. After
trying various approaches, the party has now
settled itself on the bandwagon of expanding the
middle classes - presumably through more tax
breaks and other ideas that run counter to the
current orthodoxy around value-added taxes;
however the party led by the outgoing prime
minister has also embarked on a controversial
policy to secure funding for grandiose
construction projects with the issue of bonds to
which it would like the Bank of Japan to directly
subscribe.
At the other end of the
spectrum, the right wing has become more active
with the triumvirate of Shintaro Ishihara and
Takeo Hiranuma's the Sunrise Party and Toru
Hashimoto's Resurrection Party. All the
politicians in the triumvirate have a somewhat
unfortunate history of egging on xenophobic
tendencies; the triumphalism of Ishihara in the
late '80s with his call for Japan to become more
assertive against the US; and the unfortunate
racial stereotypes he espoused which brought to
mind the propaganda of Goebbels have not been
forgotten yet anywhere in Asia or the US.
Take stock for a moment: an ancient
political party that seems hopelessly
anachronistic, an incumbent political party that
appears altogether confused, a right-wing
organization that is built on idolizing an extinct
past; does anyone hear the faint echoes from the
future of other democracies in Europe and perhaps
the US?
The economy as a cause ... and
effect I asserted earlier that the
political sclerosis of Japan was a result of its
economic mortification, a view that is against the
conventional wisdom, which reverses the
cause-effect relationship. My thinking is quite
simply that Japan has reached an economic point of
no-return; this will be now played out politically
to provide a dignified burial of the country's
ambitions.
There are multiple elements of
Japan's economic orthodoxy that are all coming
unstuck at about the same time; some by design and
others decidedly not.
First is the
country's position on top of the global supply
chains of the most complex products imaginable -
electronics and automobiles. In the old days,
electronic products relied on bulky components for
assembly, be they cathode-ray tubes (CRTs) in
televisions or drive units in tape recorders and
belt drives in high-end CD players. These
components necessarily had to be made by patent
holders, with shipping costs and import levies
becoming important barriers to entry.
Along the way though, in a quest for
efficiency, Japanese manufacturers moved a number
of their key components and in particular the
vexing business of manufacturing liquid crystal
displays offshore to China and elsewhere. They
designed micro components - circuit boards and
memory chips - that worked with these screens to
produce a range of electronics products that
powered the post-CRT world.
However, the
difference in technology platforms allowed other
entrants, most notably the Koreans, to exploit
their own pricing advantages in lower-end products
such as mobile phones and bring those to bear in
higher-end products.
Then there is the
business with cars, wherein a number of product
recalls and component disruptions have meant that
factories in Japan lost their advantages in
production and quality against lower-tier
manufacturers even as they failed to move ahead in
the design stakes in terms of new technologies
including hybrids.
It is somewhat telling
that the most interesting fuel-efficient car to
hit the production lines this year was the Tesla-S
model out of California, rather than a new
iteration of the Prius or Leaf models that
pioneered the hybrid / plug-in categories.
The supply chain itself has become hugely
complicated for Japanese manufacturers, as last
year's floods in Thailand showed. This year, a
number of Japanese factories in China had to shut
down after the incident involving islands disputed
by Japan and China. Add in the disruptions from
the Fukushima tsunami last year, and we are
talking an inexorable shift in manufacture away
from Japan.
The second aspect is power
generation and sources, an area where Japan's
peculiar geography seems set to punish the country
against its competitors. At the one end, the US is
in the middle of a shale gas revolution that may
turn energy math into the positive side of the
current account equation for the country over the
next decade or so (health warning: I do not yet
subscribe to the shale story with the same degree
of enthusiasm espoused by America's oil lobby).
The focus on renewables as a source of energy has
therefore diminished at least over the near-term.
This makes technologically intensive products such
as those involving wind and solar power
commercially unviable as investment sources over
the next few months and years.
The blows
to technology to one side, it is also a legacy of
Fukushima that Japan eschews the one source of
plentiful power that may have turned the tables to
its advantage. Without nuclear power and with no
oil around its borders, Japan faces a long and
dark road on its energy front, with every step
promising to bring the country closer to an
economically unviable future.
That is
where the third aspect of Japan's economy really
hurts. Confronted with a rapid decline in economic
relevance over two decades ago, Japan chose the
path of least social resistance; an echo of Dumas'
"one for all, all for one" philosophy wherein
real-wage deflation took the place of workforce
cuts. That slow death, though, was simply
insufficient to force the issue of
competitiveness; it merely bought time from an
inevitable fate that the political grandees
refused to prepare the country for adequately.
Conclusion Inflection points are
hard things to call, particularly in the case of
Japan where the patient has been declared dead
many times over the past few years. Even so,
recent events, ranging from the declining fortunes
of electronics majors to the uncertain policies
around power consumption and generation, may well
mean that Japan is on its last stretch as a major
global economy.
(Copyright 2012 Asia Times
Online (Holdings) Ltd. All rights reserved. Please
contact us about sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
