Japan: Let the Fiddler Play On


More on divining the entrails in Japan. Much recent western comment has been mildly optimistic on the possibility of serious change and reform in Japan. Japanese commentators meanwhile, when not actually banging their heads against the wall, seem to spend most of their time tearing their hair out. This piece from the Asahi Shinbun's Senior Staff writer is pretty typical. If they're even halway right it looks like the best we can hope for is more fudge. It seems Duisenberg isn't the only one to be busy fiddling while the empire burns.

British writer Thomas Carlyle, who lived in the same period as Karl Marx, called economics ``dismal science.'' The epithet may well apply to the current economic debate on deflation in Japan. One gets the impression that the nation's economy is going nowhere. The underlying problem seems to be a policy stasis that stems from the inability of policy-makers to draw up a unified blueprint for action. The sense of paralysis was evident at the symposium held last month at the Finance Ministry under the theme: Challenges for Japan's Economy-Deflation and Economic Policy. Symbolic of the policy paralysis is the standoff between the government and the Bank of Japan over ways of beating deflation. Government officials feel this way: ``We are taking steps such as tax cuts. Now it's the BOJ's turn to follow up.'' But central bank officials are deeply suspicious of the government. Their feeling is: ``We could be left holding the bag trying to generate inflation.''The discord came to a head at the symposium, creating acrimony among the participants. Academic panelists demanded that the BOJ change its monetary policy, but some in the audience-politicians and BOJ people-reacted sharply, saying it is wrong to blame only the central bank for inaction. A truce of sorts was called when University of Tokyo professor Hiroshi Yoshikawa, a panelist and a member of the government's Council on Economic and Fiscal Policy, said, ``The important thing is for the government and the Bank of Japan to put together a unified package of measures to remove uncertainties over the future.''

The question is specifically what kind of anti-deflation program should be worked out. If it turns out to be a hodgepodge of halfway measures, the economic situation will become gloomier still. For example, a mere increase in public works investment-a prime example of distorted resources allocation and wasteful spending-would only make things worse. On the other hand, aggressive measures focused on generating inflation could end up creating ``stagflation''-a combination of recession and inflation. What is needed is a bold plan of action-namely, a forward-looking, reform-oriented program to fix deflation. Reform means dismantling the ``construction state''-the bloated system of public works projects-and increasing investment in other areas such as environment, welfare and education. Along these lines, utmost efforts should be made to foster industries of high growth potential and create new jobs.
Source: Asahi Shinbun
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Japan: Which Side Are You ON?


I'm posting this piece from Morgan Stanley's Takehiro Sato since, apart from anything else, it is a hoot. Trying to make sense of what happens in Japan is difficult at the best of times, but when a market oriented party starts to socialise the economy, and the ex-communists begin to demand market based measures, well, I think we move from the world of the sublime to that of the ridiculous. Sato - to steal a phrase from Brad Delong - certainly seems to be 'banging his head against the wall' here. I hope it isn't too painful.

Let�s look at recent remarks by an opposition party official regarding the Industrial Revitalization Corporation of Japan (IRCJ): �The plan put forward by the government calls for dividing bank lending that has concern for recoverability into two categories, with the genuinely bad loan going to the RCC and other watch list loan being handled by the IRCJ. Yet banks should be responsible for the job of lending. In this plan, however, the government-owned corporation will be assuming the responsibility of banks and shouldering the credit risk and then using public capital to cover losses if companies fail, instead of the banks. Rather, banks should be doing the job of industrial revitalization. It does not seem appropriate for such a special public corporation to take on this role.�

Before proceeding, it should be noted that I personally am not a supporter of this party and have no intention of giving it a boost. The party�s core principles call for liberation from the exploitation of capitalism and construction of a planned economy through socializing the means of production. What is stated here, however, is mostly correct regardless of the party�s ideology.

It is rather confusing in Japan that the right-wing �conservative� party is pressing for revision of the national constitution, while the left-wing �reformist� party wants to leave the current constitution intact, for example. We find a similarly ironic contradiction in the party that stands for �liberalism� relying on government control in both macro and micro policy, while the socialist party fights for market principles and resists the takeover of excessively indebted companies by such a government-owned entity. Currently, a conservative to center-right coalition cabinet backs a socialistic economy despite the prime minister�s resolution, while left-wing opposition parties criticize these policies, therefore calling for a market mechanism. Such a distorted situation came to be a normal state of affairs, and the PM has aptly acknowledged that Japan has a socialistic economy along the lines of the former Soviet Union and East Germany.

The IRCJ runs the risk of being transformed into a holding ground for excessively indebted companies and classic example of socialistic policy, if political interference were to be allowed. Likewise, policymakers seek to prevent as much as possible an expansion of social inequalities from a hard-landing scenario. Furthermore, the core capitalistic concept of �profit-making� is seen to be nearly rejected, perhaps from some manifestation of Confucian mentality, which makes the groundwork for oriental ethics.

The most obvious example is banks. There have been policies that effectively reject profit-making by this sector through the Revitalization program which was aimed for the increase of lending to comparatively risky borrowers such as small and medium enterprises. Also, public opinion takes an extremely harsh view of bank profiting. In this sense, I have asserted that Japan�s banking business has been converted into a non-profit organization (NPO).
Source: Morgan Stanley Global Economic Forum
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If there is one thing I have learnt in following the Japanese economy closely over the last couple of years it is that, as far as Japan is concerned, you should take everything with a big pinch of salt. Still, the Nikkei is at a twenty year low, that is real and that is a fact. This week Forbes suggests it could fall below the 8,000 level, and that with year-end book-balancing in sight. They also mention a figure, 7,500, below which the capital adequacy ratios of the Japanese banks would be threatened. I remember it was just six months ago we were talking of going below 10,000 as being critical, but it wasn't. In all of this one thing is clear. The numbers, except for those relating to bad loans and government debt, continue to get smaller. One day a critical point will be reached and we'll have blow out. When exactly that day will finally come neither I nor any other commentator can tell you. The big danger is that the yawn, yawn, plus �a change effect in Japan might mean that when it actually does come we won't be expecting it. In all of this just be sure that, absent a major and unforeseeable change of trajectory, that day will come, and that the consequences for the global economy will be enormous.

Tokyo stocks could plumb new 20-year lows this week as war worries and a host of domestic factors discourage buyers. Analysts said the Nikkei average could drop below 8,000, a key support level, after falling 2.62 percent last week to 8,144.12 -- its lowest close since March 1983. "Investor appetite has dried up, so I won't be surprised if the Nikkei falls below the 8,000 mark," said Reiko Nakayama, head of the investment strategy division at Marusan Securities. Some investors may look for bargains early in the week, but the market's longer-term prospects are clouded by the prospect of a trade-disrupting war on Iraq, worries about North Korea's missile and nuclear programmes, and a weak economic outlook......Analysts said the Nikkei is likely to move between 7,800 and 8,350 this week. The further prices fall, the more Japanese banks and private pension funds are expected to dump shares in the run-up to the end of the fiscal year on March 31.
Nikkei Heading on Down?

With only three weeks to go before year-end book-closings for most Japanese companies, the drop in share prices is bad news for banks, which are saddled with mountains of bad loans, as lower valuations on their stock holdings will erode their capital.

Analysts say many banks' capital adequacy ratios -- a key gauge of financial health -- could fall below the eight percent global requirement if the Nikkei approaches 7,500. At Friday's close, combined unrealised stock losses at the top seven banking groups stood at around 5.84 trillion yen ($50 billion), according to Daiwa Institute of Research. Investors are also concerned about the ability of Prime Minister Junichiro Koizumi to deal with any financial crisis.Friday's arrest of Takanori Sakai, a member of the ruling Liberal Democratic Party, was the latest of a series of political scandals to embarrass reformist Koizumi, whose popularity is fading ahead of nationwide local elections in April. Sakai is alleged to have breached political funding laws.
Source: Forbes
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Down and Down We Go Again


Of course, all this continuing economic uncertainty is doing nothing to revive interest in buying shares in the stock markets. Yesterday it was Japans turn with the Nikkei howevring near two decade lows and the Topix falling straight through.

Tokyo shares fell on Friday morning after a speech by George W. Bush, the US president, increased market nerves, while a report of a probe into alleged stock manipulation by Nikko Salomon Smith Barney hit brokerages.The Topix index fell to a two-decade low on war fears, losing 1.1 per cent to 807.36. The Nikkei average was down 1.2 per cent at 8,269.21. Shares in Sony fell 2.5 per cent to Y4,220 as investors expect the electronics exporter to be one of the front line casualties if war in Iraq leads to a fall in US consumer spending.

The brokerage sector put in the worst performance of the morning after a local newspaper said Nikko Salomon Smith Barney would be investigated by Japan�s securities watchdog on allegations of manipulating stock prices. Shares in Nikko Cordial, which set up the brokerage in a joint venture with Citigroup of the US, fell 9.9 per cent to Y382. Nomura, Japan�s leading brokerage, lost 2.9 per cent to Y1,314. Semiconductor equipment makers were also down after Intel said on Thursday that its revenues in the first quarter could fall 2.7 per cent against the previous year. Advantest lost 3.5 per cent to Y4,960 and Tokyo Electron shed 1. 3 per cent to Y5,230. Hitachi fell 3.7 per cent at Y466 after the company said it may consider selling its headquarters building to a real estate investment trust to help it cut costs.
Source: Financial Times
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