The precarious global economy and Japan's decades long economic recovery
By Jon Fernquest[Introduction|Article]
[Reading Questions|Answers]
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As the largest economy in Asia, Japan's economic health is an important factor in Thailand's economic health. Keeping up-to-date on developments in Japan's economy should be an important item on every Thai business person's to-do list.
Today's article from the Bangkok Post features Bloomsberg News columnist William Pesek discussing the impact of the recent Subprime crisis on Japan's economic recovery. Japan's recovery has been progressing in fits and starts for decades now. Hopefully, Japan and the rest of Asia can weather the storm and maintain the momentum of Japan's recovery no matter what happens to western economies mired in the current sub-prime mortgage crisis.
William Pesek's frequent columns on Asian economies are insightful and packed with background information. [recent columns] Here is some biographical information on the columnist from the Asian Development Bank:
"WILLIAM PESEK Jr. is Asia-Pacific columnist for Bloomberg News, based in Tokyo, providing opinions and commentary on economics, business, markets and politics throughout the region. He has worked for Bloomberg in Asia since 2001, and his columns routinely appear in the International Herald Tribune, The Australian, The Straits Times, The Japan Times, and other publications. He writes a monthly column for Bloomberg Markets magazine and appears regularly on Bloomberg Television. He has worked previously as a columnist for Barron's, the Dow Jones weekly magazine, in Washington DC, writing about global economics, politics, and markets. Much of his time was spent following Alan Greenspan, US Treasury, and International Monetary Fund and World Bank officials around the globe. He has also worked for Dow Jones in New York, where he wrote the daily credit markets column for The Wall Street Journal, and the American Banker newspaper. He has a bachelor's degree in business journalism." (Source: Asian Development Bank)
precarious - not in complete control and may fail at any time
Reading Questions
Here are some questions to guide your reading (See answers at end):1. How does the Japanese economy rank among all the world economies?
2. Does the global financial system rely solely on the health of the largest economy in the world, the US economy?
3. Does a recession in Japan seem likely?
4. Under what conditions would Japan be more likely to face a recession?
5. How vulnerable would Japan be to a downturn in US demand for its exports?
6. What are the three "artificial stimulants" that Japan's recovery is based on?
7. How did the Japanese government believe that these stimulants would aid economic recovery?
8. In the long-run can Japan be a normal economy using these three stimulants?
9. Has Japan been able to fully recover from its long stagnant economy that has lasted over a decade?
10. What were the initial positive signs when Japanese has started its economic recovery?
11. What measures are necessary to get the Japanese economy moving quicker?
12. What evidence do some cite that Japan has recovered economically?
13. Does Japan need more savings or more consumption?
14. Is Japanese consumer optimism and confidence associated with higher levels of consumption or higher levels of savings?
Bangkok Post Article August 25, 2007
OPINION / THE JAPANESE ECONOMYJapan recession risk leaves Sachs wondering
By WILLIAM PESEKHere we go again! That's likely to be a common reaction as investment banks like Goldman Sachs Group Inc wonder aloud about the risk of a Japanese recession. If the world's second-biggest economy grinds to a halt, it will be no small blow to a financial system that has got used to flying on several engines, not just the United States.
The good news is that the odds don't favour that happening. "It is too early to conclude that a recession is inevitable," Naoki Murakami, an economist at Goldman Sachs Japan Ltd, wrote in an Aug 22 note to clients.
Such statements aren't as reassuring as investors might hope amid so many global challenges. The meltdown in the US sub-prime mortgage market hasn't just sent the yen soaring, but raised big questions about the health of the US economy.
here we go again - some familiar and annoying thing is happening again
wonder aloud - think about what might happen in writing or speech
grinds to a halt - slows down and stops completely
the odds - the chance, the probability
inevitable - will happen for sure
Goldman Sachs - large investment bank in the United States
reassuring - increase confidence
meltdown - big disaster, teh whole system stops functioning
sub-prime mortgage - low quality home loans to borrowers who normally wouldn't qualify
sent the yen soaring - the yen increased in value suddenly and quickly
Japan's recovery is solid enough to withstand swings in global markets, though a broad-based, global slowdown would imperil the outlook. The bigger question is how vulnerable Japan would be to a modest US retrenchment.
To Richard Jerram, chief Japan economist at Macquarie Securities in Tokyo, the answer is: not very.
"Historically, total Japanese exports have tracked the path of total US imports, with the main exception being in 1998 when the Asian crisis drove down Japanese exports," Mr Jerram said. "However, over the past 18 months the two series have diverged, showing an ability of Japanese exports to prosper even without strong demand from the US."
withstand - resist, prevent a bad influence
broad-based - involving many (countries)
imperil - put in danger
the outlook - what is likely to happen in the future
vulnerable - easily hurt and damaged
retrenchment -
tracked the path of - followed
diverged - not move in the same direction
Yet the inconvenient truth about Japan's longest recovery since World War Two is that it's based on three artificial pillars: an undervalued currency, near-zero interest rates and the highest debt-to-GDP ratio among developed nations. Japan's growth is largely based on the economic equivalent of steroids.
Getting off these stimulants is the key to Japan becoming a "normal" economy again. Rates certainly aren't being normalised; the Bank of Japan has left its key interest rate at 0.5%. While Governor Toshihiko Fukui says markets should expect higher Japanese rates, traders aren't buying it.
All along, policy-makers in Tokyo hoped these three financial boosters would create a self-reinforcing growth dynamic that got consumers and companies to spend, raising GDP and wages.
inconvenient truth - truth that creates difficulties
pillars - foundations that give strength (large concrete poles that hold a building up)
steroids - an illegal drug used by some athletes to enhance performance
getting off these stimulants - overcoming with difficulty a drug addiction
getting off these stimulants -
boosters - things that make improvements
self-reinforcing - becomes stronger the longer it remains in operation
That's not happening as planned, which is why Goldman Sachs' report - titled "Is a Recession Likely?" - raises eyebrows. It's a reminder that for all the changes in Japan, all the growth, government changes and corporate restructuring, its revival is stuck in second gear.
Getting into first gear involved banks disposing of bad loans and companies reducing capacity. Things clicked into second gear in recent years as investors began rediscovering Japan, property prices stabilised and deflation pressures eased. At many stages since 2002, Japan seemed on the verge of accelerating. Certainly, bulls will argue the economy is well into third gear, if not fourth. Their rationale is that a mature, $4.5 trillion economy growing about 2.3% is reason enough to cheer.
raises eyebrows - surprises
corporate restructuring - changing the organisation and operation of a corporation to reduce costs and increase efficiency
stuck in second gear - like gears in a car, low gears are used at slow speeds or when you are during up a hill
the economy is well into third gear, if not fourth - car moving into higher gears as the car goes faster and faster
The missing ingredient, though, is also the key to getting Japan to grow faster, end its addiction to steroids and defeat deflation: consumer optimism.
Every quarter, investors get excited about the BOJ's "Tankan" survey of business confidence. It's often a misleading indicator because it says little about whether Japan's aggressive savers will soon consume more.
A more telling indication of what's to come may be found in a recent Nikkei newspaper survey. It showed that Japanese in their 20s are becoming less interested in buying cars, drinking and spending money on leisure activities and are opting to save.
Economists will be heartened to see that the average monthly disposable income rose by 4,000 yen (1,118 baht) to 64,400 yen (18,022 baht) compared with a previous survey in 2000. They will be less happy to find 36% of respondents saying they are allocating more of their disposable income to savings.
Such trends are unwelcome news for companies. Stagnant consumption and a shrinking population bode poorly not just for tomorrow's profits, but today's. Japan's rapidly ageing population has been rattled by a recent scandal involving missing pension records. It hardly instilled confidence in the future for many households.
deflation - when prices in an economy all go down
optimism - feeling good about the future
BOJ's "Tankan" survey of business confidence -
Nikkei newspaper survey -
disposable income - income after taxes, money availble to buy things with
respondents - people who answer questions in a survey
allocating - using for a special purpose
stagnant - moving slowly if at all, without energy
bode poorly - indicate a bad situation in the future
rattled by - upset by, feel unsettled about
pension - money saved for retirement
instilled confidence - make more confident
A major wildcard for Japan is how credit-market woes affect the US economy. John Richards, head of debt markets strategy for the Asia-Pacific region at RBS Securities Japan Ltd in Tokyo, offers the following scenario: The US sub-prime crash and resulting global liquidity squeeze kill Japan's export markets at the same time as an equity crash slows Chinese growth. While Mr Richards isn't predicting that will happen - or a recession in Japan - "the R word would be more likely" to apply if global turmoil worsened.
Even so, it hardly helps that the economy isn't one of Prime Minister Shinzo Abe's priorities. As low-cost China and India rise in influence, high-cost Japan needs to work harder to maintain its standard of living. That means increasing business productivity and boosting entrepreneurship - two issues that are barely on the government's radar.
None of this means Japan is about to slide back into stagnation. It does mean that anyone expecting Japan to grow at its true potential over the next few years will be disappointed.
a wildcard - an unknown factor (like an unknown in a card game)
credit-market - market for loanable funds or money
woes - problems
scenario - possible situation in the future
liquidity squeeze - credit, loans, cash for business not available through banks
equity crash - stock market prices decline, bear market
standard of living -
on the government's radar - the government is not thinking about and planning for
stagnation - moving slowly without energy
Answer Key:
1. How does the Japanese economy rank among all the world economies?
It's the world's second biggest economy after the US.
2. Does the global financial system rely solely on the health of the largest economy in the world, the US economy?
3. Does a recession in Japan seem likely?
Too early to tell.
4. Under what conditions would Japan be more likely to face a recession?
If many countries were involved in a "broad-based" global slowdown.
5. How vulnerable would Japan be to a downturn in US demand for its exports?
Not very, recently total Japanese exports has not been that dependent on US imports.
6. What are the three "artificial stimulants" that Japan's recovery is based on?
a. Undervalued currency
b. Near-zero interest rates
c. High debt-to-GDP ratio
7. How did the Japanese government believe that these stimulants would aid economic recovery?
They would increase spending by consumers and companies and raise GDP and wages in the process, creating a "self-reinforcing growth dynamic."
8. In the long-run can Japan be a normal economy using these three stimulants?
No.
9. Has Japan been able to fully recover from its long stagnant economy that has lasted over a decade?
No.
10. What were the initial positive signs when Japanese has started its economic recovery?
a. Property prices stabilised
b. Deflationary prices eased
11. What measures are necessary to get the Japanese economy moving quicker?
a. Dispose of bad loans.
b. Companies reduce capacity.
12. What evidence do some cite that Japan has recovered economically?
A 2.3% growth for a large mature industrialised economy is actually pretty good.
13. Does Japan need more savings or more consumption?
More consumption. It already saves aaat very high levels.
14. Is Japanese consumer optimism and confidence associated with higher levels of consumption or higher levels of savings?
Higher levels of consumption. (People often save more because they are feeling uncertain and uncomfortable about the future)
