These days, any article one reads on Japan is filled with countless references to government inactio...
These days, any article one reads on Japan is filled with countless references to government inaction on the economy, feet-dragging by the Bank of Japan on monetary policy, and almost certainly something on the state of the banking sector.
Let us take the banking situation. In November, the old guard within the government succeeded in blocking FSA minister Mr Takenaka's proposal to radically reform the banking system. Commentators viewed this obstruction extremely negatively.
This so-called hard-landing proposal would have involved banks being made to dispose of their non-performing loans (NPLs), thus driving the defaulting companies to the wall. The reasoning is that the elimination of weaker companies would allow good companies to become stronger, more competitive, and more profitable. At the same time, deflation would be resolved. Official government estimates have these NPLs at ¥46trillion but independent forecasts are about three times this level.
This amounts to over 10% of the entire economy. Does anyone really think Japan can cope with the huge surge in unemployment that will surely ensue? And what will happen to consumer spending and deflation? The words downward spiral come to mind.
Proponents of the hard-landing scenario say that safety nets, in the form of looser fiscal and monetary policy, can be used to lessen the pain. The scale of such safety nets would have to be enormous and it is doubtful that Japan can afford them. The debt/GDP ratio is fast approaching 150%, and interest rates are near zero while money supply growth is at double-digit levels.
Without any doubt, the banking sector needs to be fixed but the hard-landing proposition is just too risky.
What are required are more imaginative ways to encourage banks and companies to restructure, consolidate and generally cut capacity so that deflation can be eradicated.
The danger with so much attention aimed at reforms from the macro viewpoint is investors miss the trees for the wood. Upon closer examination, there are some positive developments occurring at the micro level.
Slowly and steadily, Japan Inc is restructuring, cutting costs, becoming more efficient, and increasingly recognising the concept of shareholder value. This has largely gone unnoticed. Interim results, announced last month, provided ample evidence of such developments. Positive earning surprises came from companies such as Nissan, Toyota, Japan Telecom, NTT, Shiseido, Kao, Citizen Watch, Mitsui & Co, and Sumitomo Corp, to name but a few.
Such companies announced large earnings rebounds based mainly on cost cutting measures, resulting in sharply improved margins, ROEs, and reduced debt levels. As well as this, Japanese companies are increasingly embracing the opportunities presented by improving growth levels in Asia, and China in particular.
We are focusing on such companies, which demonstrate a willingness to become more efficient and have the management and strategic vision to do so effectively.
Positive developments at micro level.
Corporate Japan is more efficient.
Companies recognising shareholder value.
The chairman doggedly tries to be amusing
'Profitability is almost a myth'
Active Wealth in liquidation
Cautious welcome for volatility
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