The beleaguered Japanese economy should benefit from a more solid and purposeful US economy
It is indefensible, really, but many foreign observers of the US democratic process find it impossible to take seriously. The spangly pom-poms, clam bakes and oompah bands are faintly ridiculous, the policies are highly parochial, and so interest in the mid-term elections last week was minimal. But the results are important, if only for the sense of solidarity and purpose that President George Bush's administration can now build on.
Domestic political endorsement, a weak point so far for Bush, was bolstered by events at the UN, where the US has effectively called the bluff of those urging due process in tackling Iraq. Both developments offer investors good news. A more confident president is likely to push through the economic stimulus his party promised, while abroad there is now a small chance, if Iraq takes it, that war might be averted.
But once they get the habit, investors are serial worriers. The focus now is the apparent lack of will or strategy to tackle the economic limbo in Japan. Prime Minister Junichiro Koizumi bounded into office 18 months ago with fresh and forceful promises of structural reform. Since then, it has been downhill all the way, with the stock market now at a 19-year low.
The problems are well documented. Deflation has well and truly set in, due mostly to the intractable problem of bad loans in the banking sector. Hopeless companies are being propped up by commercial banks, and allowed to undercut better-run competitors, because they fund a rump of conservative politicians unwilling to give up their influence.
Rather than allow banks to close down ailing corporates, the Government has once again come up with a package of measures that tinker with reform but avoid the big issues. Each time it does this, its credibility among investors sinks further. Once again this year, there is talk of a supplementary budget, a device that allows various agencies to cushion the effects of any reforms to the point where they make no impact at all.
Analysts have tried to sustain interest in Japan by pointing to a growing band of companies that are tackling reform energetically themselves. It is true that in selected cases profits are rising despite slower revenue growth, suggesting cost cutting and restructuring. Recently some of the large pharmaceutical companies reported firm first-half profits and Shiseido, a big cosmetics manufacturer, returned to the black after two years losses. Corporate buybacks are accelerating and valuations are improving. Some compare very favourably with anything available in Western markets. But overall economic data is still conflicting ' latest industrial production was lower than expected, while GDP growth quarter on quarter was slightly stronger than expected. Far from providing reassurance, the dichotomy just stokes suspicions that the real picture is one of indefinite gloom.
Investors at one point were hoping that a revival in Japan would counterbalance a slowdown the other side of the world. Now it is becoming clearer that Japan is dependent on an upturn elsewhere to make its own sustained recovery. The Bank of Japan is so far behind the monetary curve, at a point where interest rates are near zero anyway, that it is no longer a key player. The latest half percentage point rate cut from the Fed is carrying a lot of expectations, not just for the US economy but for all the hangers-on elsewhere, of which Japan is the biggest. A nasty double-dip recession might finally force economic reform in Japan, but a politically and economically invigorated US could provide a comfortable solution.
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