Japan Watch: 6 in 5
Noda Yoshihiko, as has been prominently reported, has been elected as Japan’s sixth Prime Minister in the last five years. He is the eighth since the turn of the century. He was also, until yesterday, the eleventh Finance Minister since 2001. Revolving door politics in Japan, unarguably, contributes to the difficulty of addressing the country’s serious economic challenges: a gross debt-to GDP ratio at well over 200%, an economy firing on one cylinder since 2006, an unending deflationary cycle with interest rates at near-zero, and the structural challenges of a rapidly aging society. And that is not to speak of the ongoing effects of the earthquake and tsunami, and dealing, on a daily basis, with an untamed nuclear reactor site in Fukushima.
Last week, Moody’s lowered Japan’s credit rating, as did Standard and Poor last January. Welcome to the job, Noda-san.
One wonders why anyone would want to be Prime Minister.
There is no indication that Mr. Noda has a soaring vision to deal with the set of short-term crises and long-term challenges. On the other hand, it isn’t evident that he will do a less competent job than did his immediate predecessors. A number of things that he has said before and after yesterday’s election sound right: the possibility of establishing a coalition with some opposition parties to win needed support in the Upper Chamber; fiscal consolidation through consumption tax increases, spending cuts and selling state assets. He has the declared support of the senior business community. On the other hand, he favors official visits to the controversial Yasukuni Shrine, of war criminal fame, an extremely sore point with China and the Koreas.
And he is on a short leash: his mandate as President of the majority Democratic Party of Japan only takes him to September 2012.
This, along with GDP growth this year in negative territory, should make Japan a right-off, right? Markets should be driving the yen into the floor, and investors should be fleeing Japanese government bonds. In fact, the yen reached a high of 75.95 a few days ago, and J-bonds remain attractive to investors.
What explains this disconnect?
The answer is important for HB/HBG: without downplaying Japan’s many problems, these are spread unevenly among Japan’s economic sectors.
The public sector is where the most intractable problems lie, and thus requires fundamental restructuring: the fiscal system, the center/prefecture balance of power and taxing ability, the heavy hand of regulation, especially in services, and so forth.
But we deal with other parts of Japan, where its strengths keep the country afloat. Japan remains a vibrant trading economy, and its foreign exchange reserves exceed $1 trillion. Household savings, as of the end of 2009, were $8.5 trillion. Government pension fund reserves are greater than the Canadian GDP.
Japan’s corporations are largely debt free, and many have large war chests further inflated by the high yen. Industrial production grew last year by 7.5%. Corporate earnings increased by over 30% in 2010. Productivity indices are rising. It’s in 6th place in the WEF’s Global Competitiveness Index. Wages have been rising, if modestly, and unemployment was 4.7% in July. And so forth.
The public sector faces huge challenges, but the corporate sector, with which Canada deals, is still in business, $25 billion worth in trading terms alone last year. That’s where the action is.