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