Oil spike lubricates Japan's
economy By Hisane Masaki
TOKYO - The conventional wisdom is that
spikes in crude-oil prices play havoc with heavily
resource-poor Japan, which is the world's
third-largest oil guzzler after the United States
and China and imports almost all its oil. To be
sure, high oil prices remain a potential scourge
for the Japanese economy just as they are for
other oil-consuming countries.
But
oil-price rises have proved to be rather a boon -
at least so far - for the world's second-largest
economy. Despite high crude
prices, the Japanese economy
has been barreling ahead toward a full-fledged
recovery amid rising exports and firm domestic
consumption, with the stock market reviving and
many corporations earning record profits.
Concerns over Japanese financial
institutions have eased significantly as the
once-huge mountains of bad loans by banks have
returned to normal levels. Major companies have
cleared up their excess debts, equipment and
labor, which had weighed on their fortunes, and
are expected to log record profits for the current
fiscal year ending in March. A spate of data
released recently reinforced the view that Japan
has finally emerged from a decade of stagnation
that ensued after the "bubble economy" of the late
1980s - characterized by inflated prices of stocks
and land - burst in the early 1990s.
Industrial output posted the highest level
in 2005 since 2000, with the December figure
rising for the fifth straight month after seasonal
adjustments. Unemployment declined for the third
year in a row in 2005, to 4.4% from 4.7% in 2004,
with the December figure down 0.2 percentage point
from November's 4.6%. In December, the number of
job offers and job seekers matched for the first
time in more than 13 years.
Amid the
improving job environment, Japanese consumers are
loosing their purse strings. The consumption
propensity of wage-earning households, which is
measured by the ratio of household spending to
disposal income, registered the highest level in
15 years, at 74.7%, in 2005.
The average
stock price on the Tokyo Stock Exchange rose by
about 40% in 2005. Toward the end of the year, it
topped the 16,000 level for the first time in more
than five years. Japanese stock prices have
weathered the "Livedoor shock" that hit the
country in mid-January. By the end of last month,
the benchmark Nikkei 225 index had more than
recouped losses from the massive selloff triggered
by the investigation into Internet startup
Livedoor Co, which resulted in the arrests of
high-profile president Takafumi Horie and other
executives on charges of violating the Securities
and Exchange Law. The Nikkei index ended at a new
five-year and five-month high of 16,649.82 on
January 31, enjoying a tailwind from the release
of positive Japanese economic data. The Nikkei
average has been hovering in the mid-16,000 range
in recent days.
A key indicator for
Japanese prices rose for the second straight month
in December, suggesting that Japan might be close
to beating deflation - a situation in which prices
slide continuously, hurting growth, and thereby
bringing down wages and corporate profits. The
nationwide core consumer price index (CPI), which
excludes volatile fresh-food prices, rose 0.1% on
year in December, marking the first two-month run
of price rises in almost eight years. The central
Bank of Japan has shown a strong eagerness to
end as early as this spring its five-year
ultra-easy monetary policy under which the
financial market has been flooded with extra money
to encourage recovery. Interest rates have been
kept at near-zero for five years under the policy.
Seven major private economic institutes
estimate that Japan's gross domestic product has
expanded for four quarters in a row, with their
median forecast putting GDP growth rate at 1.2% in
real terms from the July-September quarter, or an
annualized pace of 5%. The GDP figures for the
October-December quarter are to be released by the
government on February 17.
Amid emerging
signs of Japan nearing a victory over nasty
deflation, the government projects modest economic
growth of 1.9% in real terms in fiscal 2006, which
starts on April 1 - 1.5% from domestic demand and
0.4% from exports. The government of Prime
Minister Junichiro Koizumi also expects the CPI to
register a year-on-year rise of 0.5% and the GDP
deflator, which reflects general price movements,
to inch up by 0.1%. Economists agree that the
biggest threats to a fledgling recovery in the
world's second-largest economy are external. The
growth in Japanese exports, which has underpinned
a nascent economic recovery, is led by shipments
bound for the United States and China. If the
economies of the two largest trading partners go
awry, Japan would suffer severely.
Also,
oil prices remain a source of concern. Crude-oil
prices are stuck at high levels of about US$60 per
barrel in world markets, although they remain well
below the historic peak of $70 reached last year.
World oil prices have stayed high - and are
expected to do so throughout the year and beyond -
because of structural factors that will not change
overnight. Among those structural factors are
sharply rising demand in Asia, led by China and
India, the world's two most populous countries, as
well as limited spare production capacity of the
Organization of Petroleum Exporting Countries
(OPEC). Oil prices are widely expected to hover in
the range of $55-$60 a barrel through this year,
not only because of structural factors of supply
and demand but also because of concerns about the
Middle East situation, insurgent attacks on oil
facilities in Nigeria, and the standoff over
Iran's nuclear program, among other things.
Japan relies on imports for almost all of
its oil, of which about 90% now comes from the
politically volatile Middle East. Inevitably, last
year's spike in oil prices posed a threat to the
country's economy. Another oil crisis similar to
the two 1970s oil crises - the first in 1973 and
the second in 1979 - would be a nightmare scenario
for the country. As a result of the first oil
crisis, the Japanese economy experienced its first
negative growth since the end of World War II in
1974 after years of high-flying growth. Japan
survived the two oil crises through strenuous
energy-saving efforts and technological
innovations.
While posing a continued
potential risk, however, high oil prices have so
far had only a limited effect on the overall
Japanese economy, which is among the world's most
energy-efficient. According to the International
Energy Agency, Japan's energy consumption rate -
energy consumption divided by GDP - for 2003 stood
at 0.11 ton of oil equivalent (TOE). This figure
was half the 0.22 TOE of the US and less than an
eighth of China's 0.92 TOE. A stronger yen, which
makes imports cheaper, also plays a significant
role in fending off the negative impact of a sharp
surge in oil prices. In 1980, when oil prices
broke through the $40-per-barrel level, the
currency traded at the 202-264-yen range against
the US dollar. But the yen is now quoted at about
116-117 against the greenback.
In addition
to the increased resilience of the economy to
spikes in oil prices, most analysts cite the
recycling of oil money from oil-producing
countries into Japan in the form of increased
investments in the Japanese financial markets, and
brisk imports of Japanese manufactured goods.
Oil money shores up financial
markets In April 2003, the benchmark Nikkei
225 index plunged to 7,607.88 points, the lowest
level since the burst of the bubble economy in the
early 1990s. In tandem with a gradual recovery in
the economy, stock prices began to rise. The pace
of price rises increased last spring, with foreign
investors becoming a major engine for the rising
Nikkei. Market analysts say foreign investors have
high expectations of progress in reforms under the
Koizumi government, and also think highly of the
Japanese economy's resilience to high oil prices.
Foreign investors have played a leading
role in the bond market as well. According to
Shinkin Central Bank Research Institute in Tokyo,
foreigners were net buyers of Japanese bonds worth
nearly 12.3 trillion yen during January-August
2005, up 44.8% from a year earlier, and 80% more
than the nearly 6.9 trillion investments they made
in the stock market during the same period.
According to the institute, British
investors' presence in the Japanese securities
market is particularly conspicuous. Investments
from Britain began to surge sharply in mid-2004.
During the January-July period of 2005, such
investments totaled a little more than 8 trillion
yen, or about $69.5 billion, up 30% from the same
period of the previous year. Although investments
from the US also rose 49.8% during the same
period, their size was much smaller at 2.5
trillion yen. The institute attributes a sharp
rise in British investments to an increased inflow
of oil money via European financial institutions
in London. Saudi Arabia's holdings of foreign
currency-denominated securities totaled $68.6
billion as of the end of July 2005, up 160% from a
year earlier, the institute says.
Oil-rich
Arab countries have flexed their financial muscle
overseas in recent years amid rising oil prices,
as they did during the two oil crises of the
1970s. According to the Energy Information
Administration of the US, oil revenue of the OPEC
member countries grew 27% in 2005 to about $430
billion. Oil export revenue of Saudi Arabia, the
world's largest oil producer, is estimated to have
hit a new record high of about $157 billion in
2005, up $51 billion from 2004.
In
addition to oil, gold prices have been rising
sharply on global markets on fears of terrorism
and a tightening of supply and demand. The
terrorist attacks in the US on September 11, 2001,
revived the popularity of gold as a safe haven in
an emergency. In Japan, gold prices have been
hovering at their highest levels in 15 years.
Analysts say that part of the surplus oil money is
flowing into commodity markets. Late last month, a
high-level Japanese delegation from the Tokyo
Commodities Exchange (TOCOM) visited the Dubai
Metals and Commodities Center to explore the
possibility of strengthening ties.
Investors in the Middle East, flush with
cash from the oil-price boom, are looking for new
places to put their money. They are flocking to
Asian real-estate markets, including Japan's, as
the weaker US dollar and renewed confidence in
Asian economies - and currencies - make Asian
property look more attractive than ever. Since
last summer, oil money has been flowing into the
Japanese real-estate market, fueling what analysts
call a "mini-bubble" of property prices in Tokyo.
In December, Singapore-based CapitaLand
Ltd, one of Southeast Asia's biggest developers,
established a real-estate company to offer
investment-advisory services to the Middle East
and develop projects in Malaysia, China, Japan and
elsewhere in Asia. The company plans to offer $500
million of real-estate investments to investors in
the next two years. Last year, CapitaLand set up a
$300 million property fund with Arcapita Ltd, a
Bahrain-based investment bank, to invest in
Japanese property.
With an eye on oil
money, Mizuho Corporate Bank and Sumitomo Mitsui
Banking Corp, two of Japan's biggest banks, are
planning to set up business footholds in Dubai
this year. At present, most oil money has been
invested in the US financial markets via European
financial institutions, especially in London.
According to analysts, as of the end of September
2005, Britain held US Treasury bonds worth $182
billion, 2.6 times the amount the country held a
year earlier. The sharp surge in Britain's
holdings of US Treasury bonds is believed to be
the result of huge amounts of oil money flowing
into the bonds via European financial institutions
in London. Oil money has been trickling into the
Japanese markets since around summer last year. As
prospects of an end to years of deflation are
growing, analysts expect the flow of oil profits
into Japan to increase.
Furthermore,
oil-producing countries in the Middle East are
spending more on infrastructure development and
capital investment, bringing new business
opportunities for foreign companies, including
Japanese firms. Last May, Mitsubishi Corp, Japan's
biggest trading firm, won a $3.4 billion contract
to build a light-rail network in Dubai, the first
urban commuter metro in the Persian Gulf.
Mitsubishi leads a group of companies that
includes such general contractors as Obayashi Corp
and Kajima Corp to build a 10-kilometer-long
tunnel and lay about 70km of rail line through the
city.
Dubai, the second-largest of the
United Arab Emirates' seven sheikdoms, is in the
middle of a construction boom as it invests
billions of dollars to improve its infrastructure
to keep pace with the country's nearly 10% growth
over the past few years. In November, Mashreqbank
of the UAE and Mizuho Corporate Bank agreed to
provide a guarantee facility to the Dubai Rapid
Link consortium, which is building the Dubai metro
project.
Oil spike fuels auto
exports Japan's 2005 trade surplus narrowed
by 26.5% from a year earlier to 8.785 trillion
yen, marking the first decrease in four years.
Exports rose 7.3% to 65.661 trillion yen, while
imports surged at a much faster pace of 15.6% to
56.876 trillion yen as rising energy prices
inflated the value of oil imports. In December
alone, Japan's exports rose 17.5% from a year
earlier to a record 6.338 trillion yen amid rising
shipments of automobiles to the US as well as
electronic devices to Asia, although imports also
hit a record 5.424 trillion yen, up 27.3% from a
year earlier.
Fuel-efficiency awareness
has boosted sales of Japanese cars in the US, the
world's biggest auto market. Japanese auto makers
continued to snatch US market share from their US
counterparts. The combined US market share for
General Motors, Ford and DaimlerChrysler AG's
Chrysler Group fell to an unprecedented low of
56.9%, down from 61.7% three years ago. At the
same time, Toyota, Honda, Nissan and other Asian
brands saw their US market share climb to 36.5%.
Japanese auto makers alone grabbed a record high
market share of 32.2% in the US in 2005, with
Toyota and Nissan reporting sales increases of 9%
or more for the year. Toyota's US sales were up
10% over 2004, with the company's popular hybrid
cars lifting its sales. US consumers' interest in
hybrid cars has been stimulated by heightened
interest in fuel costs as well as the environment
amid high gasoline prices.
Of the
approximately 5.47 million autos Japanese makers
sold in the US in 2005, roughly a third were
shipped from Japan. Led by resurgent exports to
North America, Japan's auto exports also rose for
the fourth consecutive year in 2005. Japan
exported 5.053 million autos, up 1.9%, in 2005,
marking the first time in 12 years that it has
shipped more than 5 million autos abroad. Exports
to North America, to where a little more than
one-third of Japanese exports are shipped, grew
for the first time in three years, totaling 1.854
million units, up 7.4%. Japanese auto makers
assemble all their hybrids at domestic plants. In
the North American market, Toyota's hybrid sales
soared 170% to 151,000 units in 2005, while
Honda's rose 60% to 44,000 units.
Meanwhile, US auto makers were stalling.
GM's sales fell 4% for the year. Ford's sales also
dropped 4% in 2005, as consumer demand for trucks
and sport-utility vehicles (SUVs) fell in the face
of high gasoline prices. Higher material and labor
costs, as well as a loss of market share to
Japanese rivals and a drop-off in demand for SUVs,
all contributed to the malaise. GM, the world's
largest car maker, posted a net loss of $4.8
billion for the October-December quarter, compared
with a loss of $99 million a year earlier, in the
face of high costs, reduced market share and flat
sales of SUVs. In November, GM launched a
restructuring plan involving 30,000 job cuts and
nine plant closures in North America.
Following in GM's footsteps, Ford also
announced last month that it would close 14 plants
in North America, resulting in the loss of up to
30,000 jobs, nearly a quarter of its North
American workforce. Ford's share of the US auto
market slumped to its lowest level since the late
1920s, to 17.4%.
To be sure, strong
exports, especially to the US and China, have been
a major driver of the Japanese economic recovery.
But high oil prices have fueled Japanese exports
to major oil-producing nations as well. Personal
consumption is booming in oil-producing countries,
resulting in increased imports, many of them from
Japan. Exports by OPEC member countries are
estimated to have doubled to more than $600
billion since 2002, while their imports are also
estimated to have grown by about half that, to
well over $300 billion.
Ironically, while
Japanese drivers are crying about high gasoline
prices, Japanese auto makers are jubilant about
booming exports to Russia and other major
oil-producing nations. Japan's overall exports to
Russia jumped a whopping 40.9% in terms of value
during the January-November period from a year
earlier, with exports of used autos doubling and
those of new autos surging by more than 30%.
Among Middle Eastern countries, Japan's
overall exports to Qatar, Kuwait, Iran, Oman and
Saudi Arabia rose 72.0%, 26.9%, 22.5%, 20.5% and
14.8%, respectively, in value, driven by strong
shipments of new autos. And in Latin America
countries, Japan's overall exports to Venezuela
and Mexico - both major oil exporters - rose
faster than other regional countries in value,
soaring 56.8% and 30.9%, respectively.
The
same story held true in Africa, with Japanese
exports to the Democratic Republic of Congo and
Nigeria climbing faster than other countries on
the continent, ballooning 86.3% and 35.7%,
respectively. Japanese exports of steel and
general machinery to oil-producing countries are
also on the rise, reflecting strong capital
investments there.
Hisane Masaki
is a Tokyo-based journalist, commentator and
scholar on international politics and economics.
Masaki's e-mail address isyiu45535@nifty.com.
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