The Global Recession: Holding the Flood Waters at Bay?

This week I would like to continue my discussion of the state of the Japanese economy during the current financial crisis. Last week I wrote about the rising value of the Yen. Globally the rising value of the Yen will have a large impact on trade flows. I would like to extend this discussion by exploring Japan’s prospects in the upcoming period of global recession. As the global recession seems unavoidable at this point, many analysts are questions how deep and long the downturn will be. This week Japan joined a list of nations announcing that their economies were already in recession.　It also seems likely that the U.S. economy is in recession, given that Japan’s recession stems from a contract in exports to the U.S. and Europe. As European and American consumers tightened their spending following the subprime crisis, Japanese exports have plummeted. Additionally, the increase in the value of the Yen has also cut into Japanese export earnings. There has been a lot of mixed information about how severe the recession will be for Japan; with some sources saying that the Japan’s economy is in a good position and other sources claiming otherwise. If Japan does have a severe recession what will it mean for the current Prime Minister and political system? In order to answer these questions I have decided to search the web to see what the blogosphere have to say concerning the issue. The first article I have chosen is by Alpha Sources blog entitled, “Japan- the Recession is Here”. The second is an article called “Japan Sinks” hosted by the Japan Forum. I have included the comments below, but have also linked to the sites for your convenience.


Japan Sinks

Tobias,

Thanks for you post on the possible political effects of the current global recession for Japan. I agree with your assessment that the Japanese political elite has failed to come up with effective policy to end the long stagnation of the Japanese economy. Particularly, the last three Prime Ministers have been unable to address the problems facing Japan in the last few years. Hopefully the global recession will break the LDP’s hold on power and reinvigorate the political system. Although there does not appear to be a viable alternative to the LDP in the DJP, couldn’t a major election loss split the LDP? I think the most effective way to change the political system would be such a split in the LDP, separating the more conservative faction from the reformist factions. This would introduce a real competition of ideas into the Japanese political system. In order to reach a competitive system, the DJP may have to win several elections to induce change in the LDP’s staid party structure. The past 8 years with Koizumi’s reforms, a succession of three different Prime Ministers, and the current economic crisis all point to a likely crisis of legitimacy for the LDP. Do you see that as a likely outcome or do you think that Japanese politics will muddle along as usual?

While I found your article extremely engaging, I have one point of minor contention. You state that Taro Aso “leaves behind a country tottering on the brink of ruin.” Don’t you think that is a bit of an exaggeration? It is precisely because Japanese people have suffered relatively little from the last 20 years of varying degrees of political ineptness that the system continues the muddle along. In fact compared to the EURO zone and the U.S., Japan’s recession seems that it will be relatively minor. In fact, given Japan’s relatively healthy banking system it seems to possess a unique advantage in an international financial meltdown. As a recent article on Bloomberg.com stated, “Japan's got a fairly straightforward problem: it's experiencing an export-driven recession…it's nasty, but not particularly complicated. The rest of the world has a financial system disaster on its hands.”What is your opinion on this line of thought? Thanks again, and I look forward to reading your future posts.

Cole


Japan- the Recession is Here

CV,

Thanks for your detailed analysis of the Japanese economy as it heads into recession. It is pretty clear that the EURO zone and U.S. economies will be very hard hit by the financial crisis. According to your analysis the Japanese economy was already on a weak foundation before the financial crisis entered its acute phase. The Japanese financial system seems to be in pretty good shape in comparison to the European and American systems. However, since the Japanese economy is pretty much dependent upon exports to both regions, a recession in those regions will draw out the Japanese economy’s recession. Do you think there is room for Japan to offset its export losses by investing resources in expanding its hold in developing markets such as China, India, Russia, and Brazil? Given the weak position of America’s carmakers vis-à-vis Japanese carmakers, Japanese carmakers could use this opportunity to expand their market share further in America and in middle-income nations. You also state in your article that,“ increased savings through deposits are likely to be channeled into cheap government funding, we also know that Japan’s savings are increasingly flowing out towards higher returns.” Given the volatility of the current global financial environment, do you think that more Japanese savings will be invested domestically?

Even if Japan performs better relative to the other developed countries, it still seems to be facing some serious problems. Japan has never properly adjusted away from an export-based development model, even though it has a highly developed economy. Recently, the American and British economic models of finance-based, capital intensive growth also seem faulty. In what do you think Japan must reform its economy to be able to face its future challenges?

Thanks again. I look forward to reading your future posts on this issue.

Cole

Yen, Dollars, and the Subprime Crisis

In recent weeks the Japanese stock market has suffered declines even greater than the American and European markets. At first glance, this might seem somewhat puzzling. Japan’s banking system has had little exposure to the sub-prime mortgage mess, and Japan’s consumers have an estimated $15 trillion in savings. Japan would appear to have relatively few worries compared to America and its imploding banking system and skyrocketing unemployment. To a degree the fall of the Japanese stock market can be attributed to concern over the weak state of the American and Euro Zone economies, together which account for over a third of Japan’s export markets. However, if one takes a closer look what is really scaring Japanese traders is something that America traders usually welcome with joy: currency appreciation. Since the beginning of the financial crisis in October, the Yen has increased about 30% in valuation vis-a-vis the dollar, and even more against the Euro. Why is this giving Japan such a scare? The origins of the Yen’s current appreciation are closely tied to the origin of the sub-prime crisis and America and Europe’s current financial woes. A stronger Yen is likely to damage Japan’s economy in the short run, however, it is probable that it also signals a shift to more consumer purchasing power in Japan, which may be good news for the rest of the world.

As I discussed in my first post, Japan’s banking system is propped up by an enormous sum of money saved by Japanese households. In fact, Japanese households save so much money there has been a chronic and massive excess of money in Japan. As can be seen here, even after loans there is colossal excess of 145 trillion Yen held by Japanese banks. In order to put this money to productive use banks invested huge sums abroad; the majority being used to by US dollars and debt. In this way, Japan’s over saving problem helped to feed America’s over consumption problem. The Japanese government allowed this to go on because it pushed the Yen’s value down versus the Dollar and EURO. The cheaper the Yen became, the more competitive Japanese exports became, allowing Japan to increase trade surpluses even as its imports skyrocketed . Both of these contributed to the deteration of the U.S. economy of the past several years.
American politicians constantly tout the need for a stronger dollar, demonstrated by the "strong-dollar policy" of the past twenty years. As recently as February of this year, even President Bush, who has presided over the largest deficits in American, history claimed, "We believe in a strong dollar policy...and in the ability of the economy to grow economically."However, they are mistaken in their assumption that a stronger dollar means a stronger economy. A stronger dollar has made U.S. manufacturing exports increasingly uncompetitive abroad, while increasing the competiveness of foreign imports. A prime example is the rapid detorioration of the American car industry, not only abroad, but within the U.S. as well. At the same time Japanese cars have virtually conquered the U.S. and European markets. That is not only because Japanese cars tend to be more fuel efficient and suffer fewer break downs, but because they been very cheap compared to American made cars. This same logic can be applied to a variety of Japanese products that are edging out their European and American competitors such as computers, driers, washers, televisions, cell phones etc. Japanese corporations reinvested their profits, leaving cash to spare in the banking system. The spare cash found its way back to the U.S. feeding American’s borrowing binge, even as U.S. manufactures sold less overseas. That brings us to the financial crisis and the current strengthening of the Yen.

The rapid strengthening of the Yen versus other currencies is evidence of Japanese investments returning from abroad, and is likely to lead to a decline in the enormous Japanese trade surplus. As the financial crisis has made American and European assets increasingly risky looking to investors, investment in the Yen has increased. Additionally, Japan’s banks are recalling their investments from abroad. The rise in the value of the Yen coupled with the global downturn will lead to a sharp contraction in the size of Japan’s trade surplus. However, a stronger Yen, while hurting exports, will further increase the buying power of the Japanese consumer. Although a contraction in exports will hurt Japanese businesses, the Japanese consumer should be able to enjoy unprecedented buying power. This might provide a bit of a cushion for American and European businesses that export to Japan. If the Japanese consumer uses that buying power to purchase more imports both the European and American manufacturing. The Japanese consumer has reputation for being frugal, and the news of a global down turn will only enforce these habits. Time will tell if the strengthening of the Yen will be a win- lose situation, or ultimately reenforce an already deep global downturn.

Green Revolution: Perspectives from Japan

Today I am would like to take the opportunity to explore the globalization of the environmentalist movement and how this is having effects upon Japan’s own green consciousness. While I was in Japan, I noticed that Japan is in many ways greener than Europe, especially in the areas of public transportation, energy conservation, and waste management. However, most of those were government directed initiatives and the strong NGO environmental movement seemed to be lacking in comparison to the U.S. and Europe. The Japanese environmental movement began around the time of the oil shock in the late 1970’s. In comparison to American and European environmental movements that seem to focus on a “saving the planet” mentality, in Japan, environmentalism has always had a strong nationalist origin. Since Japan has no fossil fuels of its own, the government has worked towards energy conservation and efficiency for the purpose of national and economic security. Therefore, I decided to explore the blogosphere and investigate ways in which globalization is changing the Japanese environmental movement and how Japan’s own environmental policy is influencing other nations in their pursuit of energy independence and environmental harmony. The first article I would like to discuss is titled. “Japan as a Model For China’s Green Revolution”, and is hosted on The Green Leap Forward, a blog about environmentalism in China. The second blog I chose was one of those on my link roll, Trends in Japan. A recent article on Trends in Japan focuses on a recent fashion show and how collaboration with an environmental NGO produced some interesting results. The links to both comments are hyperlinked below, and additionally I have provided my two comments for each site.

"Japan as a Model for China's Green Revolution?"

Julian, I really enjoyed you post China’s current environmental situation, and how Japan can provide a model for China to emulate as it moves forward with environment policy. Despite China’s rapid growth, I think there is a lot of room for China to control its CO2 output while its economy develops. Additionally, I think Japan provides a good example of how a Green Revolution and economic development are not mutually exclusive. As your article stated, Japan’s own move into more energy efficient production and production of energy efficient products helped to move its economy into a high-tech, lucrative direction. Even now, many of the companies that managed to produce these energy efficient products in the 1970’s Oil Shock are the most competitive companies from Japan, such as Honda, Toyota, Sharp, etc. Like Japan in the 1970’s, China seems to be a critical junction in the development of its economy away from a labor intensive one to a capital -intensive economy that produces high-tech products. The recent scandals with tainted food products and product defects have hurt China’s reputation globally. A move into “green products” and a “green economy” has the potential to give China’s manufacturers a better reputation amongst the globes consumers, particularly those in the developed world. This would allow China to avoid any sort of consumer backlash against its products. In your article, you express a fear that a move into high-tech manufacturing will simply move the production of goods from China to other nations such as Vietnam and Indonesia. However, greater national energy, such as that achieved by Japan, would help to control the cost of energy for production helping China to produce energy at cheaper rates than its competitors. With cheaper energy, China could remain competitive even in the manufacture of low-end goods vis-à-vis developing countries for some time to come. Japan’s state driven approach to environmental regulation and energy conservation will be easier for China to implement than a more NGO driven movement, given China’s lack of a functioning democratic process. If the Chinese government sees environmentalism as being equal to energy independence, it will be much more likely to pursue significant reforms in that area. So I’d like to thank for your timely article on this important issue.

"Tokyo Girls Collection Gets Green"

Rebecca, I enjoyed your timely article on Tokyo Girls Collection’s attempt to go green. I appreciate how you attempted to analyze what aspects of the show were successful and innovative in comparison to the more half-hearted aspects such as the “eco bag”. I think the use of model statements on how they reduce their own carbon footprints or work to live a more environmentally conscious existence is particularly important. The influence celebrities have over fashion, in both Japan and abroad, is undeniable since they are the source of many new trends. The use of celebrities as a source of environmentally conscious lifestyle is particularly important in the age of mass global media. The “My Challenge” pledges by the models to reduce their carbon output by 1k a day added a degree of legitimacy that the statements would have otherwise lacked.

While I thoroughly enjoyed your post, I found myself hoping that you discussed the importance of the issue at hand and what effects you thought I might have for the Japanese environmentalist movement as a whole. I felt that they entry was too much of just a brief summary of events, but would gain much from a more detailed analysis. Just added a few sentences of commentary would have filled out the article a bit more and made it more engaging for the reader. I understand that the purpose of Trends of Japan may be to present a more news-like reporting of events, however, given the lack of information about Japan related trends online, an occasional discussion of the topic would create a more engaging blog. I look forward to reading your entries in the future.