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Japan: Light at the end of the
tunnel?
By John Berthelsen
For 13 years, as Japan has struggled from one
economic calamity to the next, financial analysts,
bankers and investors have been waiting to hear five
words: "The economy is turning around." Like the light
at the end of the tunnel, which periodically used to
appear to the Americans in Vietnam only to go dim again
thereafter, however, there have been plenty of false
starts.
Now the Japan External Trade
Organization New York (JETRO NY) is hearing those sweet
words again and has produced a study saying that
"Businesses and Investors Perceive a Change in Japan's
Economic Prospects".
The study seems
surprisingly even-handed for being produced by a
government organization, but it may not be even-handed
enough. Japan has enormous structural difficulties that
are not going to be solved by the rise in the Nikkei,
Japan's benchmark stock index, or by a pickup in exports
as the US economy starts to recover and US consumers
again seek Japanese consumer goods.
Nonetheless,
for the first time in years, JETRO NY says, Japanese
companies and the government have not met the end of the
fiscal year in March by artificially ramping stocks to
protect banks and investors from having to write down
the value of their portfolios. After an initial fall,
the Nikkei has risen more than 20 percent, which is
faster than the Dow Jones index over the past 10 months.
"Whether this performance will prove sustainable
or accurately reflects current fundamentals remains to
be seen," JETRO says. "While Japan has achieved real
progress in implementing structural reform and other
measures that are helping to improve efficiency and the
overall competitiveness of the Japanese economy, much
remains to be done and markets rarely move in linear
fashion.
"What is clear, however, is that
businesses and investors are beginning to recognize the
inherent value that lies within the Japanese economy and
they are starting to take steps to position themselves
accordingly."
For example, the study quotes
Credit Suisse First Boston (CSFB) global equity
strategist Andrew Garthwaite as recently advising
investors to change the amount of Japanese equities in
their portfolios from a 12 percent underweight to a 2
percent overweight position. Taking a similar but
slightly more cautious view, Merrill Lynch Japan has
upgraded Japan in a global portfolio to "neutral" from
"underweight" as a hedge on the world economic recovery.
Portfolio investment funds into Japanese equities have
been positive for five of the last six weeks.
In
addition, the Bank of Japan's Tankan survey of major
companies, released last month, showed that large
Japanese companies have become less negative over the
past few months. The Tankan measures the percentage of
companies saying business conditions are better, minus
the percentage saying things are worse. The headline
index has been in negative territory since March 2001.
Changing investor and corporate sentiment toward
Japan can be viewed as a net positive, JETRO says.
"However, this optimism should by no means be
interpreted as a sign the nation has overcome the many
difficulties and risk factors that must be addressed to
achieve a sustainable recovery."
Indeed. For one
thing, deficit spending has pushed Japan's national debt
to truly frightening levels. According to the Ministry
of Finance, gross debt stood at 143 percent of gross
domestic product (GDP) at the end of fiscal year 2002,
not including sizable amounts of off-budget,
non-government bond debt, as opposed to 58.9 percent in
the United States. The only government that came even
close in the industrialized world is notoriously
spendthrift Italy, at 106 percent.
According to
the Organization of Economic Cooperation and Development
(OECD) Economic Outlook issued in June 2002, the fiscal
deficit in Japan in calendar 2002 was 8.0 percent of GDP
on a general government basis, and 8.4 percent excluding
social security funds, by far the worst deficit among
major advanced countries. Prime Minister Junichiro
Koizumi has been unable to make much headway in reducing
either.
Japan's Ministry of Finance, which
sometimes seems to bear a pathological antipathy to
inflation, is also threatening again to charge higher
interest to government-affiliated institutions. Higher
interest rates would place a greater strain on the debt
loads of Japan's already strapped borrowers and would
threaten any nascent recovery unless they are carefully
managed. But, while many believe higher interest rates
may serve as a constraint on Japan's economic prospects,
the sentiment is mixed, JETRO says.
This can be
seen in the July 10 comments of Morgan Stanley chief
investment officer John Alkire in the Financial Times,
who noted his belief that higher rates could boost the
Japanese economy, stating: "Consumption will rise
because savvy individuals will stop hoarding money and
lock in ultra-low fixed rates for large-ticket items
such as mortgages and real estate."
Japan's
seemingly endless round of deflation, compounded by weak
economic growth since 1990 when Japan's stock-market
bubble collapsed, has restrained consumer spending,
leading businesses to cut back their spending. While the
Tankan survey suggests this may be about to change, it
is not clear whether consumer and business demand will
expand sufficiently in the foreseeable future to
constitute a source of sustainable growth.
Nonetheless, as JETRO points out, Japan's
consumers are not particularly parsimonious, as can be
seen in most of the high-end shopping malls of Southeast
Asia, where Japanese tourists continue to sample the
Louis Vuitton and Gucchi. Per capita consumer
expenditures in Japan are the same as in the United
States. And Japan remains the world's second-largest
economy, which accounts for 15 percent of the world's
total GDP - about four times the size of China, which
gets all the ink.
Optimism is also reflected in
the Japanese cabinet's "Economy Watchers" survey, an
index measuring sentiment among restaurant owners, taxi
drivers, and other small business and service workers
who are in a sense leading indicators of consumption
trends, JETRO says. The index rose 3.7 points to 42.1 in
June from the previous month. As with the Tankan
results, one must maintain caution when evaluating this
statistic, as while representing a real improvement, a
reading below 50 still means more people say they are
worse off now than three months ago.
One of the
biggest questions remains whether Japanese companies, so
nimble in developing consumer electronics and other
goods for international markets, are ever going to be
able to alter their traditional business practices.
JETRO says there are signs that companies have begun to
recognize the need for change. Some US and other foreign
companies believe a transition is taking place, partly
engendered by the fact that multinationals are
increasingly buying into Japanese companies and changing
their corporate architecture.
Citigroup now has
more than US$8 billion in equity capital invested in
Japan. WL Ross recently purchased Osaka-based Kansai
Sawayaka Bank. Nissan has been revitalized by Renault of
France. Kenwood, the audio-equipment maker, is
restructuring on its own and recently posted its first
consolidated profit in four years after having spun off
money-losing divisions, as did NEC Corp, one of Japan's
biggest semiconductor companies.
The question is
whether Japan can sustain the budding movement toward
economic reform. Many difficult issues remain to be
resolved, JETRO says, including the ability to clean up
bad loans and restore the health of Japan's financial
system, to promote the dynamism of new businesses,
start-ups and technology development as well as labor
flexibility and the issues presented by an aging
population.
In addition, Japan launched the
Industrial Revitalization Corp of Japan in May to begin
finally to purchase non-performing debt and transform
Japan's so-called zombie companies, as the United States
did promptly by creating the Resolution Trust Co during
its savings-and-loan crisis of the mid-1980s to buy up
dud assets, convert them to equity and sell them off.
The IRCJ, as it is called, has a five-year mandate
before it is to be dissolved. It expects to use public
funds and technical assistance to nurse at least 100
companies back to health and reorganize them.
However, other observers point out that the IRCJ
- which has gotten under way a full decade after the
magnitude of Japan's problems became apparent - has yet
to find a single company to rescue and many think it
probably won't, because of the magnitude of debt and
inability of the system.
The government's
injection of 2 trillion yen ($16.8 billion) in public
funds into Resona Holdings, Japan's fifth-largest bank,
was an unprecedented move that shocked Japan's banking
community and was the country's first effective
nationalization of a banking institution. JETRO says the
move was handled professionally and expeditiously and
managed to avoid a deposit run. Nonetheless, the scale
of Japan's banking problems virtually defies solution.
Japan's banks have an estimated $3 trillion in
non-performing loans and possibly much more on their
books.
The government has also set up 117
special zones for structural reform, JETRO says, which
provides local governments with the ability to obtain
waivers from national regulations to aid in their own
economic development, with such examples as
establishment of a more diverse educational curriculum,
around-the-clock customs clearance for importers and
exporters, accepting credentials for foreign medical
professionals in target industries such as biochemistry.
Nonetheless, JETRO itself recently conducted a
survey of 449 foreign-affiliated companies in Japan on
the country's inherent strengths and potential. The
results were disheartening to say the least. Some 41
percent expect that it will take yet another three to
five years for the economy to recover and an astonishing
27 percent think it never will. Some 43 percent do think
opportunities are arising in their own businesses,
however.
It is tempting to go with the 27
percent. Japan's politicians are completely in the
thrall of the construction industry and have responded
to the economic downturn with wildly inappropriate
pump-priming projects that have virtually destroyed the
country's environment. Hardly a streambed in Japan
remains unpaved. There are roads and bridges to nowhere,
airports where no airplanes land.
Japan got rich
by manufacturing high-quality consumer goods cheaply and
selling them primarily to the Americans. With the Plaza
Accord of 1983, which engineered a dramatic downward
drop in the US dollar, the country had too much of its
manufacturing plant offshore to cheaper sites.
Free-trade zones across the planet pop up in
ever-cheaper countries as one after another seeks to
beggar its neighbor.
Japan's inability to
restructure its industries and its banking system has
left it at the mercy of the tiger economies and, after
the tiger economies, even less-expensive ones. In
addition, it is beset with serious demographic problems
from a rapidly aging population and a lack of young
people to revitalize its society.
Nonetheless,
JETRO says, continuing movement toward restructuring,
reform, business revitalization and deregulation
promises over time to provide increasing ongoing
evidence of Japan's progress, and commitment, to
achieving a full economic recovery. "With this in mind,
corporate and portfolio investors would be wise to
devote more attention to current trends in Japan, to
determine how they effect, and potentially benefit,
their own investment and business development
decisions."
Piece of cake.
(Copyright
2003 Asia Times Online Co, Ltd. All rights reserved.
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