The 1990s are now being described as the Lost Decade in Japan. For the past 10 years, the Japanese e...
The 1990s are now being described as the Lost Decade in Japan. For the past 10 years, the Japanese economy has effectively stagnated and asset prices, not surprisingly, remain close to their decade lows. The banking system remains mired in a huge non-performing loan problem, while companies continue to struggle to find the cash to service their existing debts.
The Government, which started the 1990s with a strong surplus in its budget, is now running huge deficits that threaten its very solvency. In terms of the personal costs of the slump, you only have to walk around the capital's stations to see the real consequences of rising unemployment and associated homelessness. Japan's slump is affecting the general population in a way that few would have believed only a few years ago.
Only 15 years ago, Japan was seen as a model of the future for economic growth and development. "Think of the longer-term", "Gain market share at any cost", and "Invest heavily in capacity" were the Japanese-inspired management mantras of the late 1980s that were chanted with the same fervour as newer analysts have recently extolled the virtues of the US 'new paradigm'.
In the end, Japan's economic boom of the 1980s turned out to be little more than a credit boom from which Japan has spent the past 10 years attempting to recover. We wonder whether the US economy will now take as long to recover from its more recent credit-fuelled boom. The similarities between Japan in the late 1980s and the US in the late 1990s are much too close for (investor) comfort.
For the past 10 years, Japan has essentially been saving in order to repay its debts. Unfortunately, saving to repay debt can give rise to what economist JM Keynes referred to as the "Paradox of thrift". If we all save, no one spends. If no one spends, no one earns income. If there is no income, then there is a recession. Hence, until the Japanese stop trying to save in order to repay their debts, their economy will remain in a recession.
This is not just a problem for Japan. With the US economy now also slipping into a recession, the fact that the world's two largest economies are essentially weak does not bode well for world trade and profits and employment trends around the world. In particular, the Asian economies are being badly affected. Not only are their trade flows to both the US and Japan weakening, so are their trade flows to each other. If Thai companies are not making profits by selling to Japan, then Thai consumers will not be employed and they will not therefore buy goods from Malaysia or anywhere else in the region.
In South-East Asia, the lack of export growth is troublesome and it will constrain overall growth in these economies.
For Taiwan and Korea, the situation is perhaps rather more serious. These two economies are among the two most indebted in the world. Their domestic economies are rather like Japan's, still attempting to resolve the problems associated with their previous excesses and therefore growing only modestly or not at all. Also similar to Japan, they have so over-invested in physical capacity that if their export growth continues to plummet, we can only assume that capacity utilisation will fall even further.
For these countries, this will not just involve an opportunity cost in terms of lost production. If they cannot sell their goods, then their companies will not have the cash to service their debts and they too will become insolvent. As Korea is already finding out to its cost, this situation can lead rapidly to rising bankruptcies and higher unemployment. For these countries, the Asian crisis has returned and their currencies and equity markets seem set to remain under downward pressure in the medium term.
The US/Japan/Asian slowdown also has negative implications for China. The Chinese authorities appear to have reacted to the slowdown in their export growth by tightening their domestic policies in an effort to restrain import growth. This overtly mercantilist response might seem surprising but China has always been sensitive to the condition of its trade balance. The authorities evidently rationalise that if their companies cannot export, they should prevent their population from importing as well.
Japan's economic slowdown is therefore not just an issue for Japan but for the entire Asian region. Indeed, manufacturers are also feeling the depressing effects that Japan is exerting on world trade as far away as Italy, Germany and the UK. In short, Japan's economic slowdown is going global and with the US economy now unable to counteract it, we expect Japan's slowdown to depress profits around the world and particularly in Asia. Japan needs to act soon if it is to rescue itself - and by implication much of the world - from its current slowdown.
Any recovery strategy in Japan must be aimed at removing the incentive to save on the part of Japanese consumer and corporate manager. Low interest rates on their own will not achieve this aim (they have not so far) but a resumption of the zero interest rate policy combined with an expansion of liquidity in the financial markets would certainly help.
Zero interest rates would encourage Japan's banks to 'trade the yield curve' by borrowing 'new' money from the central bank and investing it into the bond markets. This flow of new money into financial markets might then lead to a rise in asset prices and to a recovery in balance sheets that would alleviate the need for Japanese consumers to save. Such a policy was used by Greenspan to great effect in the early 1990s to head off the US savings and loan crisis. We see no reason for it not work in Japan today but, of course, the policy has to be enacted before it can work.
We are confident that the Bank of Japan will soon enact such a policy. Unfortunately, the introduction of a policy is being delayed by a number of factors that range from currency concerns to the debilitating internal politics of Japan's bureaucracy.
As a result, we do not envisage that any policy shift will happen before April 2001 and any economic recovery before the fourth quarter.
When it comes, Japan's recovery will be built on rising asset prices and wealth, just as the US recovery in the early 1990s was under similar circumstances.
As Japan recovers, it will act as a locomotive for the entire Asian region and for world trade in general. However, until the Bank of Japan switches tack and enacts a return to the zero interest rate policy, we can only assume that Japan's economy will continue to weaken and depress the Asian region.
Andrew Hunt is chief economist at Dresdner RCM Global Investors
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