ABC, CBS, NBC, CNN, BBC, Reuters all report: Japan headed to recession--BUT
After all the hooplah about the "Asian Economic Crisis" and the "Japanese Banking Crash" and the "Failing Japanese Economy", Japan quietly announced via it's government web site that its 2002 GDP was $5,058 billion (at 107 yen/dollar), up a whopping 5.5% from 2001, and up 15.3% from 1990. With 40 million worker's households, this is $126,450 per household, wherein monthly living expenditures average a mere $3,995 and taxes average an even more meager $1,373 monthly:
$126,450 = GDP per household
47,940 = living expenditures ($3,995/month x 12 months)
16,476 = taxes ($1,373/month x 12 months)
$62,024 = savings = 49% of GDP
$2,481 billion = gross savings ($62,024/household x 40 million households)
This is a gross savings rate of 49% of GDP.
Average over 46 million households at 107 yen/dollar:
Average propensity to consume in 2002 increased 1% from 2000 to 73.1%, meaning that the average household saved 26.9% of disposable income and 22.6% of total income. This was 121,850 yen or $1,139 each month, $13,668 per year, and over 40 million households a total personal savings of $546.7 billion.
So the final analysis of this "crisis" is that each Japanese household saved 1% or $11.39 less each month than they would have saved without the "crisis". As further evidence of this lack of an economic crisis, Bank of Japan reports that, at 107 yen/dollar, currency and deposits in 2002 were $26.4 trillion, up 2.1% from 2001 (not counting $7.1 trillion in commercial banks).
ABC, CBS, NBC, CNN, BBC, Reuters, Asia Times all report: Japan headed to recession--
BUT the numbers just keep on looking good for Japan!
Not only does the following article from Business Times refute all the doom and gloom stories from American "mainstream news media" like ABC, CBS, NBC, CNN, BBC, Reuters, and the English version of Asia Times, but the Japanese government itself notes that it's 1997 GDP was a WHOPPING 18% higher than it was only 7 years earlier, in 1990. An additional 2.2% raises Japan's total after-inflation growth since 1990 to 18.8%, something we haven't done for more than half a century.
Japan revises up Oct-Dec annualised GDP data to 2.2% growth
March 11, 2003
TOKYO - Japan's economy grew at an annualised rate of 2.2 per cent in the October-December period, the government said today, revising upward its previous calculation of 2.0 per cent.
The updated figures for the gross domestic product the value of a nation's goods and services released today from the Cabinet Office reflected higher investment by businesses.
On a quarterly basis, the economy grew 0.5 per cent from July-September, the Cabinet Office said, leaving its preliminary data unrevised.
Japan's economy performed relatively well in October-December as consumers went out and bought TVs, games and home appliances, but analysts warn prospects for a continuing rebound were slim.
Deflation continuous declines in prices continues to hobble growth by stifling consumer spending, shrinking corporate profits, and making it harder for borrowers to pay off debts.
Record-high unemployment, an ongoing shift in manufacturing to cheaper production sites overseas, and a lack of new businesses are also hurting the economy.
Reflecting higher business investment, the Cabinet Office revised the capital spending component of its data up to show a 2.6 per cent rise from the previous quarter, compared to 1.0 per cent in the preliminary data.
Gross National Product (GNP) per Capita
Japan headed to recession with GDP December 6, 2001 Posted: 5:30 AM EST (1030 GMT)
By Alex Frew McMillan CNN Hong Kong
TOKYO, Japan -- Japan is expected to make its recession official when it releases its third-quarter gross domestic product figures on Friday.
Economists forecast that Japan's economy shrank 0.4 percent in the September quarter from the June quarter, and 1.8 percent year-on-year, according to a Reuters poll.
Japan escaped the textbook definition of a recession - two down quarters in a row - on a technicality with its last GDP figures. The government reported a 0.8 percent drop in GDP for the second quarter.
It originally reported a drop in the first quarter, too. But that was switched to a rise of 0.1 percent when the data was revised.
Koizumi's popularity still strong Still, even the Japanese government forecasts an overall decline for Japan this year. In early November, it forecast a 0.9 percent drop in the economy for the business year through March 2002.
In response, Prime Minister Junichiro Koizumi's government has passed one extra budget and is planning a second.
But the supplements are smaller than normal, and the reformist leader has also pledged to rein in government spending.
His cabinet on Tuesday approved budget guidelines for the next business year that cap new bond issuance at 30 trillion yen ($242 billion), one of his most vocal reform goals.
Despite the slumping economy, Koizumi's popularity ratings are unexpectedly high. They have flagged slightly from the record levels after he took office in April. But they have held up over the last few months.
The latest Nikkei poll showed his approval rating stands at 78 percent.
Unemployment at a record 5.4 percent That high level of support will be vital if he is to succeed. His critics, including some members of his own party, question whether Koizumi can push reforms at a time Japan's economy may need government support, to avoid a brutal downward spiral.
Capital spending by companies rose 0.5 percent in the third quarter, fresh figures showed on Wednesday. That was the seventh straight quarterly rise.
But economists noted that there has been a steady slowing in growth, and the figure was only a marginal gain. Most other indicators have painted a very ugly economic picture.
Japan's unemployment rate stands at an unprecedented 5.4 percent. Incomes are shrinking. Business confidence is down. Bankruptcies and business failures are rising.
Faced with that darkening economic cloud and persistent problems at Japan's banks, the three main credit rating agencies recently dropped Japan's creditworthiness. Japan is now in a tie with Italy, as the least-likely major industrial nation to pay back its debts.
Japan's public debt load stands at a massive 140 percent of gross domestic product. Rating agency Fitch predicts that could rise as high as 200 percent by 2007 at the current rate.
Most of Asia suffering In Asia, the most tech- and export-oriented economies, Singapore and Taiwan, have already confirmed severe recessions.
Hong Kong narrowly averted the same dubious distinction with its third-quarter GDP, which showed a slight rise.
Most of the region's economies are suffering badly. Even if emerging economies are posting slight gains, they tend to rely on outsize growth.
China's expected 7 percent growth for the year is the strongest in the region. But even that may not be enough to offset job losses as its economy switches from farming to an industrial and service mix.
Japan's slump is doing nothing to help. It is the largest Asian trading partner for most Asian countries.
Some economists believe that Japan's GDP figures are too dated and erratic to give a true picture of its business and industry. Many opt to look at other indicators such as the "diffusion" index, to see if it is in recession.
But a second negative quarter would meet the generally accepted western definition of recession. The world's two largest economies are lagging, with the United States having already posted one down quarter.
Using another set of statistics, the National Bureau of Economic Research said that the longest business expansion in American history ended this March, after exactly 10 years of growth.
The research group says that was also the start of a recession for the U.S. economy.
Richard Jerram, Japan economist for ING Barings, dates the start of Japan's recession to January.
Japan prepares for poor GDP
Asakawa allegedly fiddled with the government's hotel bills
Thursday's arrest of a Japanese diplomat on suspicion of conspiring with a hotel manager in Osaka to overcharge the government for accommodation grabbed Japan watchers' attention.
But Japanese foreign ministry official Akio Asakawa's alleged fraud will soon be at the back of the government's mind. On Friday, Prime Minister Prime Minister Junichiro Koizumi is expected to announce a new cash injection into the country's beleaguered economy in a separate - and rather more deliberate - move to take the attention away from the next batch of bad news. Japan's latest gross domestic product (GDP) figures are expected to indicate that the economy is still slowing. Mr Koizumi's budget boost is expected to be aimed at job creation, in response to last month's rise in unemployment to more than 5%, a record high for the country. Recession fears Financial market officials predict that Japan's GDP fell 0.9% during the second quarter of 2001. Some news reports in Japan were more pessimistic, predicting a 1.2% fall in output. Either way, recession fears are vivid: Technically a country is only in recession when it has suffered negative growth for two quarters in a row. And given the current economic difficulties suffered by the Japanese people, it is widely predicted that growth will also be negative during the third quarter, from July to September. Japan's economic crisis is taken seriously internationally, with the credit rating agency Moody's Investors Service on Thursday announcing it is considering downgrading Japan's debt. "I don't understand why they decided to do this now," finance minister Masajuro Shiokawa said on Thursday.
Japan Q1 GDP surprises with 0.1% growth
By Japan Bureau Chief Michiyo Ishida
Japan's gross domestic product (GDP) for the January-March quarter grew a real 0.1 percent from the previous quarter, up from an initial estimate of 0.0 percent, the government said on Wednesday.
The revised first-quarter growth surprised many analysts who had expected the figure to show a contraction.
Capital spending for the quarter was revised to a rise of 0.7 percent from October-December, worse than the initial estimate of a 1.9 percent rise.
That showed companies were still not investing in new equipment, keeping alive the idea that Japan is close to its fifth recession in 11 years.
Growth in capital spending edged down, as widely expected, because companies remained concerned about their prospects in the face of uncertain conditions overseas and slow demand at home.
Domestic demand remains slow and deflation remains a problem.
Pointing to possible problems ahead, Japan's trade surplus fell 0.6 percent to 993.8 billion yen in April as global demand for Japanese exports such as cars and electronics slowed, separate data released by the Finance Ministry showed.
Exports have been one of the brightest spots in the economy.
Other data released by the Bank of Japan on Wednesday showed domestic corporate goods prices fell 0.3 percent in May, suggesting deflation was maintaining its grip on the economy.
While corporate profits are likely to rise 13 percent in the year to March 2004, according to Nomura Securities, much of the growth is coming from cost cuts rather than improved business.
Cost-cutting often means job losses, which have a knock-on effect on consumer spending, one of the relatively firm parts of the Japanese economy in recent months.
Consumer spending rose 0.2 percent in the first quarter, slightly down from a preliminary 0.3 percent rise.
Falling Down Japan Slips Back Into Recession
An electronic stock board in downtown Tokyo indicates a plunge in share prices. Earlier today, the Japanese government announced that the gross domestic product fell 1.4 percent in the October-December quarter. (Koji Sasahara/AP Photo)
T O K Y O, March 13 Japan slipped into technical recession late last year as consumers tightened the grip on their wallets, but the government dismissed its own data and said the worlds second-biggest economy was on the verge of recovery. The contraction confirmed the difficulties in Japans struggle to escape its worst downturn in half a century. Japan spent all of 1998 in recession, but economists said the detail in todays figures showed a light at the end of the tunnel. Can Japan grow? The answer is going to be a resounding yes, said Jesper Koll, chief economist at Merrill Lynch Japan. The Incredible Shrinking Economy The economy shrank 1.4 percent in October-December from the previous quarter, an annualized rate of 5.5 percent, government data showed. This was worse than the consensus forecast of a decline of about one percent and was at the low end of a range of private economists forecasts. Gross domestic product the measure of all goods and services produced in the economy was dragged down by slumping personal consumption by companies slashing winter bonuses, by fading government stimulus and by a fall in net exports. The decline in GDP followed a one percent slide in July-September, marking the classic definition of a recession.
Not a Recession Government officials shrugged off the quarterly drop as a one-time aberration, seizing instead on an unexpected rise in corporate capital spending and a subsequent improvement this year in personal consumption, the lions share of economic activity. Although GDP was negative for two consecutive quarters, I do not consider this a recession, said Economic Planning Minister Taichi Sakaiya. New areas of growth, such as in information technology, will pull the economy forward. For the full calendar year, the economy eked out 0.3 percent growth as a first-half surge outweighed the late-year slowdown. Some economists, however, cautioned that the economy is not out of the woods yet.
Profits, Sales Rise Profits and sales are up and a recovery in capital spending is in sight, but it remains to be seen whether personal spending will recover, said Fuji Securities chief market economist Yasunari Ueno. Profits are rising and industrial output has been surging, but consumers are reluctant to spend as companies undertake long-overdue restructuring and unemployment is near record highs. Many economists also cite the unreliability of the figures, which ignore changes in Japans economy for example, much IT spending is excluded. Sakaiya said he remained confident that the economy will post GDP growth in the fiscal year ending this month and would likely hit the government target of a 0.6 percent expansion which would require a 2.0 percent January-March rebound.
Recovery? Indeed, his agency appears set this week at last to declare an economic recovery. Sakaiya said the agency on Friday will upgrade its assessment of the economy in its monthly report, adding that signs pointing to a self-sustaining recovery were growing. Finance Minister Kiichi Miyazawa reiterated that he hopes the economic improvement will allow the government to avoid compiling another economic stimulus package later this year. Japans decade-long addiction to government spending has given the nation the worst public debt burden in the industrial world, scaring markets and putting its credit ratings in danger. But some analysts say a supplementary budget is becoming more likely not because of economic strength but because of political weakness. With Prime Minister Keizo Obuchis popularity dropping due to a series of scandals and mishaps, senior officials say he will likely wait as long as possible to call general elections that must be held by mid-October. The most optimistic scenario for the election is probably some time in August or September, giving the government some time over the summer to put forward a supplementary budget proposal as a way to garner some votes and do well ahead of that election, said Lehman Brothers economist Matthew Poggi.
Copyright 2000 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Japan: The 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.
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Worst Case Scenario
The interior of the ministry is still outfitted partly with rotary-dial phones. And typewriters. Bells chime every workday at 3 p.m. to remind employees to do their calisthenics. Small things, of course, but they are signs that while the U.S. zipped along a new technological path in the 1990s, Japan was stuck in a slow-motion devolution from economic miracle to financial debacle, doing things the old way by subsidizing money-losing industries. "I used to be asked quite a lot to give advice to Americans, to explain our success," says Ryozo Hayashi, a vice minister. "But it's been a long time since Japan was seen as a rising sun."
Setting sun is more like it. The stock markets plummeted last week to depths Japan hasn't seen since 1984. By the end of this month, total government public debt will top $5.5 trillion, a head-spinning 130% of GDP. (America's $3.4 trillion in federal public debt is 35% of GDP.) "Japan's public finances are very near collapsing," Finance Minister Kiichi Miyazawa said in uncharacteristically blunt remarks on March 8. He wouldn't say he was trying to drive down the price of the yen, but that's exactly what happened. The next day he backtracked.
While the economy appears close to imploding, the political machinery is grinding to a halt. Prime Minister Yoshiro Mori, who plans to meet President Bush in Washington this week, has overseen a scandal-ridden administration. His political colleagues are maneuvering to replace him within a month. Bush, meanwhile, has promised to treat Japan less as a pupil and more as an equal, which sounds diplomatic but not perhaps helpful. "They're going to have to figure out for themselves what to do," Treasury Secretary Paul O'Neill told Money magazine.
If Japan is suddenly registering on Washington's radar screen again, it's because a Japan in free fall coupled with a U.S. slowdown could imperil the world's economy. A deflated yen, already at 20-month lows, could tilt the trade imbalance further in Japan's favor. And the noise of a bursting stock-market bubble heard across the U.S. last week sounded eerily similar to what Japan experienced a decade ago. "It wasn't a miracle for Japan in the 1980s," says Tadashi Nakamae, an economist who co-authored the alarmist tome Wake Up, Japan! "And it wasn't a miracle for the U.S. in the 1990s either."
While there are important differences in the two economies' slumps, the parallels are instructive. The strong-yen policy of the 1985 Plaza accord sucked money into the Japanese stock market, which soared 300% from 1985 to 1990. Treasury Secretary Robert Rubin's strong-dollar stewardship did much the same for the U.S. stock market in the 1990s. The boom was characterized in Japan by inflated land prices, in the U.S. by the NASDAQ. Japan in its heyday, and the U.S. in its later boom, both experienced huge boosts in worker productivity, high growth and low inflation. Japan's manufacturing and management prowess were held up as a new model; in the U.S., technology was the salvation. Both countries were thought to be on to something revolutionary, and a resulting euphoria deluded people into thinking the booms could be permanent.
The differences between the two countries, however, are in America's favor: U.S. banks are in better shape; businesses are quicker to react; and workers are more mobile. Even if the U.S. follows Japan into recession, that doesn't mean Americans will experience a decade of descent. At least not if they learn from Japan's mistakes.
"It's very simple," says Eisuke Sakakibara, a former Ministry of Finance vice minister for international affairs. "Japan delayed the structural reforms that were needed." It's not as if Japan did nothing. Sectors long shielded from competition, like financial services, have been opened to foreign investment. Foreign firms that now run car companies Nissan and Mitsubishi are closing factories and revamping inefficient supply systems. And the Sonys and DoCoMos of Japan have flourished in part because they separated themselves from the old cartels and figured out how to combine technological know-how with marketing savvy.
But at the core of Japan's problems are its banks. Starting in 1998, when the banks were on the verge of collapse, the government authorized spending 70 trillion yen (nearly $600 billion) to shore them up. Trouble is, the government hasn't forced banks to reconcile bad debts, which now total at least $246 billion. Meanwhile, corporations are beginning to whack away at the cross-shareholdings, the financial bindings of the old business networks. These reforms are necessary. But they are also a big part of why the stock market is reeling, as corporations and banks alike sell off their investments. That process is expected to accelerate this week and next because of the softened yen and because the end of the fiscal year -- March 31 -- is near, and under new accounting rules, banks will have to write down their market losses.
As Japan takes some radical steps, though, it continues to support unprofitable enterprises with ties to the entrenched Liberal Democratic Party. These sectors -- agriculture, transportation, construction and thousands of small businesses around the country -- have escaped attempts to weed out the weak. If the banks start calling in their bad loans, companies from these sectors would be first in line, so it has been in the interest of the L.D.P. to stave off such a day of reckoning. "Say there are five companies in one industry," says Yasuhisa Shiozaki, a reform-minded L.D.P. lawmaker. "Government interference makes them all as unproductive as the weakest one of the five." It does that with direct subsidies, by shielding them from imports and by not forcing lenders to call in bad loans.
Following up on initial steps toward reform would help Japan's fundamentals over the long term. But the really scary part is that dramatic attempts to rev the economic engine right away have had minimal effect. The government, originally acting on the advice of Washington, tried to stop the initial slide by slashing interest rates and funding huge public-works projects. But the government spending has been directed toward things the country really doesn't need: expressways in rural areas and bridges to nowhere. The Bank of Japan has dropped interest rates to near zero, but that hasn't worked to stimulate the economy either.
The central bank and the Ministry of Finance have openly feuded over what course of action to take. Last summer the bank defied the finance ministry by raising short-term rates from zero to 0.25%. But after the GDP declined, the bank lowered interest rates again, to 0.15%. And when officials meet next week, they are expected to discuss dropping rates to zero again by April.
Last week government officials finally admitted what everyone else has known for a long time: Japan is in a deflationary spiral. This is where it gets dangerous. Companies aren't investing, so they don't expand, so unemployment rises, so people put off spending, so prices decline, so people save their money because they figure things will cost less in three months or a year than they do now.
Is there any way out? "The younger members of the party recognize this is a crisis," says Shiozaki, a member of the lower house of parliament. "I think some of the old ones even understand that now." Shiozaki and a gang of younger Liberal Democratic pols are attempting a coup, trying to grab control of the party. This kind of thing is breaking out all over, even at MITI. After 17 years at the ministry, Yoshiaki Murakami, 41, quit in 1999 to start an investment fund. His plan: to shake up boardrooms by challenging the cross-shareholding system that protects troubled banks and companies. He attempted a hostile takeover, the first in Japan, of a small electronics company last year. It failed, but Murakami is not deterred. "Look at Yahoo," he says. "It lost money, so suddenly the CEO leaves. Of course! In Japan? Never happens! Now is the time for shareholder power."
If Murakami learned this kind of thinking at MITI, the symbol of Old Japan, it was by observing what not to do. The rest of Japan has had plenty of lessons in that in the past decade. Now it's time to see what it has learned.
With reporting by Sachiko Sakamaki/Tokyo and Adam Zagorin/Washington
Tokyo puts banks under the gun Aug 05 Martin Fackler | Wall St Journal | Tokyo
Japan has raised the pressure on some of its biggest banks to clean up their act, ordering 15 lenders to improve profits or face penalties, including possible firing of management.
The move is the latest by regulators under Banking Minister Heizo Takenaka to tighten the screws on lenders that have racked up years of losses while failing to pull themselves out of a decade-long bad-loan crisis. Mr Takenaka has pressed bankers to move faster in dealing with their problems -- or face the threat of greater government intervention. Since taking office in October with vows to fix banks within two years, the former Harvard University professor has pushed for tougher audits and quicker disposal of bad loans.
Friday's order by the regulatory Financial Services Agency also underscored how inconsistent reform efforts have been in the past. The directive targeted 15 banks that had received tens of billions of dollars of public funds in 1998 and 1999 to help clean up bad loans. They include three of Japan's four biggest lenders: Mizuho Holdings, UFJ Holdings and Sumitomo Mitsui Financial Group. The fourth-largest, Mitsubishi Tokyo Financial Group, was not named because it is the healthiest of the biggest four banks and did not need to take any public funds in those two years.
Tto get the funds, the banks had to promise to meet performance targets they drew up for themselves. For years, the lenders have continually missed their targets, yet regulators took no action.
Mizuho, Japan's largest bank, had set a goal of earning ï¿½256 billion ($3.27 billion) in the year ended March 2003. Instead, it posted the biggest loss in Japanese history at ï¿½2.26 trillion.
Privately, bankers say they feel betrayed by the new pressures from the government and that it is giving them contrary demands.