I pity Kaoru Yosano, who has just succeeded Shoichi Nakagawa as Japan’s new finance minister. Nakagawa was forced to resign on Tuesday after delivering a Sylvester Stallone-like performance at a press conference following the G7 summit over the weekend (the comparison is somewhat harsh on Stallone). Nakagawa was widely perceived to be drunk, although his official explanation was that he had had too much cough medicine.
Whatever the truth, his bleary-eyed, slurred performance was probably better than that of the Japanese economy in the fourth quarter of 2008. The GDP data, released on Monday, showed the economy shrinking at an annualised rate of 12.7%, its worst performance since the oil shock of 1974. This meant that Japan’s economy contracted by 0.7% in 2008, the first annual drop since 1999. Consequently, Business Monitor International has revised down its 2009 forecast for Japanese growth to -4.9%, from -3.1% previously.
This has negative implications for Asia. Japan is still the second-largest economy in the world, and typically the third- or fourth-largest trade partner of most Asian countries. It is also the biggest source of foreign investment in several Asian economies, and any new woes for corporate Japan thus have the potential to hurt Asia too.
But why is Japan suffering so much more than the rest of the world, when it was not the source of the current global recession? Three reasons:
• Firstly, Japan’s domestic demand has been weak for many years, thanks to an ageing (and since 2007 shrinking) population, and a structural shift in favour of lower-wage part-time or temporary-contract workers in place of the system of lifetime employment.
• Secondly, and as a result of weak domestic demand, Japan’s growth has been driven to a high degree by exports, demand for which is now collapsing.
• Thirdly, the process of global deleveraging has caused the yen to surge to its highest level in years, if not decades, against major world currencies, thereby hitting exports at their most vulnerable time.
Some may blame the use of the yen as the main funding currency of the global carry trade when times were good, and its subsequent unwinding, for Japan’s woes. But this begs the question of why the yen came to be used as a funding currency in the first place. And the answer to that is because Japan’s interest rates were at or near zero for much of the late 1990s and 2000s, because its economy was so weak, due to its structural flaws.
Oddly enough, those who last year hoped that the Japanese economy could ‘decouple’ from the US are right that such a phenomenon can exist. Unfortunately for them, the proof of this was in the 1990s, when the US boomed, but Japan languished in its lost decade!
If I am correct about Japan’s economy shrinking by 4.9% in 2009, this means that real GDP will be back at 2004 levels by the end of this year. Given that I am also pessimistic about growth over the next few years, my calculations suggest that Q1 2008 levels of GDP will not be returned to until late 2013 – hence my belief in a second ‘lost decade’.
However, more likely is that Japan is now experiencing a lost eternity as a result of its structural flaws and demographic decline.
I see only three potential saviours:
• The opposition Democratic Party wins the next election, which must be held by September. Although the party is not that radical in terms of reform, some political change is probably better than none, especially since there has not been a decisive shift in power since 1954 (the 1993 opposition victory proved too ephemeral).
• Japan decides it has no choice but to open the door to massive immigration to top up and rejuvenate the work force, and introduce new ideas in society.
• Japan somehow harnesses new technologies through unorthodox academies to offset its structural weaknesses.