Posted on 11/21/2002 4:36:32 PM PST by MadIvan
As Japan's government announces another dollop of public spending, its debt is downgraded again by a leading rating agency. The news comes after gloomy economic forecasts and sharp falls in the share prices of Japan’s banks. Speculation is mounting that some of them will be nationalised
TALK about piling on the gloom. On November 21st, one of the leading credit-rating agencies, Fitch, announced it was, yet again, downgrading Japan's sovereign-debt rating. This was the latest in a series of humiliating assessments for Japan. And it came on top of gloomy economic forecasts from the Bank of Japan, on November 20th, and the Organisation for Economic Co-operation and Development (OECD) the day before.
The one bright spot in all the bad news came when Yutaka Imai, an OECD economist, said the organisation had changed its mind about the prospects for this year. New information available after the report went to press led the OECD to be marginally more optimistic. Mr Imai said he and his colleagues no longer expected Japan’s economy to contract this year. Instead, he said, it was likely to remain flat.
That zero growth is an improvement is a telling indication of Japan’s economic mess. This has not altered the OECD's broader assessment: that the economy is in serious trouble. The prospect is for virtually no growth till the end of 2004. There is no sign yet of an end to deflation, now in its third year. And the problems created by Japan’s crisis-ridden banking system are in ever more urgent need of attention. On the day the OECD report was published, there were further precipitous falls in the share prices of Japan’s biggest banks—by more than 16% in the case of Mizuho, the world’s biggest bank.
The problems of the banks, and the prospect of even tougher government action to tackle them, explain the collapse in their share prices of late. The recently appointed minister in charge of financial regulation, Heizo Takenaka, has made no secret of his desire to force through reform in the banking sector. A report published by him last month disappointed many observers because it pulled too many punches—its release had been delayed while influential politicians from the ruling Liberal Democrat Party (LDP) sought to tone down some of its provisions. But Mr Takenaka’s commitment to change has raised fears that one or more of the big banks will be nationalised, a move potentially made necessary by tougher and more realistic treatment of bad loans.
Change cannot come a moment too soon for the OECD, which noted that too much precious time has already been lost. Non-performing loans—where the borrower cannot make interest or capital repayments—need to be properly classified and sufficient provision made for them in banks’ balance sheets. The OECD thinks that proper incentives need to be provided for the disposal of such loans and that the banks should be forced to restructure themselves, with better management and credit assessment—even if this results in some banks closing. At the same time, bank lending needs to be made more profitable to give the banks a sounder basis on which to operate. The OECD criticises the authorities for putting pressure on banks to lend to small and medium-sized firms when the interest rates do not compensate for the risks involved.
But as the OECD report points out, progress in one policy area alone is not going to be enough to solve Japan’s economic problems. It calls for “concerted policy actions on all fronts”. Easier said than done, of course, given Japan’s cumbersome political and bureaucratic structure. In a sense, there are few fresh prescriptions in what the OECD has to say. But as the problems drag on unchecked, the need to confront them effectively becomes more urgent. The OECD believes that “a major change in the way the economy has operated since the early 1970s” is needed.
The news on November 21st, that the LDP's political leaders have finally agreed a new package of spending measures to be included in yet another supplementary budget, is hardly likely to convince the OECD that the necessary changes are imminent. (Nor will it do much to help the government's ballooning debt position.)
Besides the banking sector, the OECD identifies deflation, fiscal policy and the burgeoning government debt, and the uncompetitive nature of much of the economy as areas in need of urgent remedy. With the downside risks greater than they were, and no sign of an end to deflation, the OECD thinks monetary policy needs to move into uncharted territory. It urges the Bank of Japan to consider a range of new measures to tackle deflation. It also says that inflation-targeting might eventually have a role to play.
There are signs that the Japanese government is trying to push the Bank of Japan in the direction of further monetary easing—more, presumably, than the small tweak made by the bank at the end of its two-day meeting on November 19th. On the same day, the government formally requested the bank, when intervening in the foreign-exchange markets, to do so using what is known as “unsterilised” intervention—by leaving the yen it sells to buy other currencies as extra liquidity in the financial system. The finance minister, Masajuro Shiokawa, publicly acknowledged that he favoured this approach.
All this was interpreted by some foreign-exchange traders as signalling that more intervention to push down the value of the yen may be imminent. On several occasions in the recent past, Japan has sought to lower the yen’s level because of worries that its rise would hurt exports.
But the OECD is far more concerned about the large part of the economy that is not export-oriented. Japan has what the organisation describes as a dualistic economy: the domestic, or protected, part of the economy is “remarkably unproductive”, which reflects poor resource allocation underpinned by, above all, poorly enforced competition law and regulation.
As the OECD concedes, though, driving reform in so many areas at once is a difficult political task. Economic restructuring, which is likely to lead to more unemployment in the short term, is bound to be unpopular at a time of zero growth or recession. The government’s freedom of maneouvre on the fiscal front is very limited, partly because of its high budget deficit and soaring government debt, now running at nearly 150% of GDP. At a time when the country faces a rapidly ageing population, Japan badly needs to stabilise its fiscal situation.
Reform is beginning, in some areas at least, to move in the right direction—though the OECD describes much of this as “timid”. So far, the ambitious reform plans of the prime minister, Junichiro Koizumi, have been more noticeable for their absence than their effectiveness. The OECD is not, on the whole, prone to exaggerate gloom. That is why its report on Japan makes such depressing reading.
Remember back when Michael Crichton was writing "Rising Sun" and how Japan was supposedly going to rule the world? I know someone who has dealt with the Japanese central bank - he said to me, "They're so clumsy and foolish they deserve their fate."
Quite.
Regards, Ivan
I've heard that deflation is much worse than inflation. I never understood why.
You don't need Japanese ones though. Samsung (Korean) TV's are just as good and cheaper. As for cars, you can buy American and British and do just as well. Electronics - the low end of the market for those come from China. Forget it, who needs anything Japanese anymore?
Regards, Ivan
Uh, we did. The Feds prop up our housing market, stock market,bond market,etc.
I like manga and anime... : )
The word you're thinking of is kaizen. It refers to refining and perfecting a product in a series of short steps. This works quite well up to a point. Cell phones have been kaizen'ed well beyond necessary functionality, for example. My cell phone has a 650 page manual written in dense Japanese and there's a quick reference guide to the manual.
The incestuous corporate relationships you're referring to was called zaibatsu before WWII and keiretsu afterwards.
Here's a simple analogy. Let's say you take out a 30-year mortgage on a house for a monthly payment of $2,000 a month. At the time you took out the mortgage, your family income was $6,000 a month so the mortgage was 33% of your monthly income. Not so bad, right?
Now let's say that deflation took place and your wages remained stagnant, and even dropped. Now that mortgage is starting to look bigger all the time. For while your family income is decreasing, the mortgage stays the same, and consumes a larger portion of your paychecks.
With inflation, the reverse is true. As you go deeper into a mortgage, your payments become easier and easier to make because you are making more money while the mortgage stays the same. My parents bought a home in 1968 with a monthly mortgage of $168 a month. At the time, it was nearly two weeks of my father's pay. But by the time they paid it off in 1998, the payment was a nuisance and even a running joke because when I financed my first car in 1985, my car payments were higher than my parents mortgage!
Now imagine the same situation with a large business with millions of dollars in long term debt and you can imagine the havoc deflation will wreak. It's hard to grow a business when all your revenues are going towards servicing your long term loans.
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