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Japan faces growth quandary
Despite Japan’s so-called lost decade
from 1991-2002, when its economy stagnated, the country still
remains the world’s second largest economy after the United
States and well ahead of Germany and China.
The stagnation in Japan, which was the first to show the way for
fast-paced growth in other rapidly growing Asian economies, was
largely a result of government reluctance to carry out
significant economic and structural reforms.
Its key response had been to drop interest rates to negative
levels and to provide large cash hand outs through major tax
cuts designed to encourage consumer spending.
These measures looked as though they may never work, but
eventually the behemoth Japanese economy worked itself out of a
bind.
Among the factors that led to the stagnation was a significant
revaluation of the yen, engineered in the late 1980s at the
insistence of an American government tired of trying to compete
with Japanese imports and creatively erected Japanese trade
barriers.
For decades the Japanese had used a lowly valued yen as a trade
weapon, nurturing a variety of industrial sectors from steel to
car making behind a variety of barriers that largely protected
the home market.
Structural adjustments did not keep pace with the rising value
of the y9en but the huge economy kept ticking over with minimal
government interference until a significant upturn began in
2002.
“The economy has grown at an annual rate of 2.2% for five years,
and most forecasters project growth close to this pace through
at least 2008,” according to Richard Katz, co-editor of the
monthly Oriental Economist Report, in an article in the latest
Far Eastern Economic Review.
Katz said some economists believed Japan had undergone a
long-term improvement in its economic fundamentals with
non-performing loans at giant banking corporations falling from
8.4% in March 2002 to only 1.8% of total loans in March this
year.
Returns on assets, which historically have not been very robust
because many corporate leaders had chased growth at any cost,
has risen from 3.3% during the “lost decade” to 4.7% for the
country’s 5,000 largest companies.
Katz noted that labour productivity, the key ingredient for
improved living standards, has risen from 1.5% previously to
2.2% annually in the last five years.
However, Katz says there are two problems with this bullish
viewpoint – there has been no major improvement in the lives of
ordinary people and there is “less than meets the eye in some of
the fundamentals”.
He argued that the problem of non-performing loans as well as
improvements in company profits have been resolved through “a
huge covert transfer of income from ordinary households to banks
and corporations”.
This has taken place via the Bank of Japan’s zero overnight
interest rate policy with commercial banks able to use customer
deposits to be lenient towards corporate borrowers so that even
today 17% of all loans fetch less than 1% interest.
In addition, Katz noted that wages in the first five months of
this year were 2.7% below the real, price-adjusted, level in
2001.
It is no surprise therefore that Japanese prime minister Shinzo
Abe has seen his ruling Liberal Democratic Party face a serious
defeat in the recent elections for the upper house of Japan’s
Diet (parliament).
Katz says the current return on assets for major Japanese
companies is less than it was in the 1980s and about half the
level in the US, while the cyclical nature of productivity gains
suggests trend levels have not accelerated beyond the post-1991
average of 1.6%.
Already faced with huge budget deficits, the aging of the
population will its number swell by some 10 million people in
the next two decades while the proportion of the working age
population declines steadily.
Back in the glorious days of near double digit growth, now some
four and five decades ago, Japan’s famed zaibatsu or giant
family-based corporations such as Mitsui, Mitsubishi and
Sumitomo became global-sized giants in banking, steel-makers,
ship and motor vehicle production behind cleverly constructed
barriers to imports.
China presents a much more open economy especially where foreign
direct investment is concerned, raking in billions of dollars
for all kinds of manufacturing enterprises.
According to Katz, FDI in Japan was only 2.4% of GDP in 2005.
Although double the level in 2000, it contrasts with 13% for the
United States and 25% for Germany.
Japan remains somewhat wary of foreign takeovers as indicated by
recent moves involving Nippon Steel and counterparts in South
Korea and China to try and cocoon themselves against foreign
encroaches.
One way the Japanese continue to protect its corporate sector is
by allowing mergers between large domestic companies.
According to Katz, until recently the Japan Fair Trade
Commission almost automatically approved mergers as long as
their combined market share did not exceed 35%.
And in future, this figure is being pushed to 50% on the basis
that economies of scale are needed to compete in a borderless
world.
“The argument is false,” writes Katz in his FEER article, “Mixed
Omens on Japan’s Recovery”.
“Japan’s strongest exporting industries are those facing fierce
competition at home.
“Moreover, only in a few business sectors are imports, a high
share of consumption.
“That makes the global market irrelevant in measuring
monopolistic power.”
Clearly, the Japanese are having a hard time unlearning the very
worthwhile lessons of the past that may have lost their
relevance in the “lost decade” and, possibly, in coming years as
well.
 
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