Japan set for another plunge on economic rollercoaster


ANALYSIS:Recession-hit Japan, seen this week by Brian Cowen and a delegation of Irish business hopefuls, looks fairly prosperous to the visitor, writes Harry McGee

DOWN NEAR the waterfront in the Shiodome district of Tokyo, a bold new quarter has been built from scratch over the past five years. Looking at the small mountain range of gleaming skyscrapers, snazzy shopping malls, elevated walkways and a modernistic monorail, it’s impossible to reconcile all this über-confident development with the notion of recession.

Yet Japan has been in recession for much of the past decade. The bursting of a massive property and asset-speculation bubble in the late 1990s threw its financial institutions into crisis. The situation led to inertia for the following decade, with interest rates reduced to zero and the economy experiencing continuous deflation.

Japan’s zero per cent unemployment record disappeared, creeping up to 5 per cent. And a new phrase, “zombie companies”, was coined to describe those companies kept alive by banks even though they were insolvent. Some were property companies the value of whose assets had fallen by more than 30 per cent and with clearly no ability to repay their debts. Yet there was a reluctance to call in the loans.

The Shiodome district is not an exception. The whole of Tokyo radiates the kind of wealth, efficiency and order you would expect from the world’s second-largest economy. It is obvious that recession here resulted in a very different outcome to the grim situation in Ireland during the 1980s. For one, Japan started from a much higher base: annual growth had averaged 5 per cent in the 1970s and 4 per cent in the 1980s. Its Celtic Tiger was called the “Japanese miracle” until more prosaic reality intervened.

While experiencing recession, Japan remained the world’s second-largest economy. And while the standard of living fell, during the worst of times the average national income stayed comfortably ahead of many other western economies. Many major manufacturing companies stayed in profit despite the banking crisis, sourcing funds from the US and elsewhere.

Kikuo Kuroiwa is a Tokyo-based banker who experienced at first hand the effects of the 1990s crisis. He worked for a major Japanese financial institution for 20 years. But it closed in 1998 because of the crisis. Subsequently he became president of Bank of Ireland Asset Management in Japan.

“What is happening in Ireland is very similar to what happened in Japan in the late 1990s,” says Kuroiwa. “Banks need to consolidate. Japan has a population of 123 million. In the banking sector we used to have 12 big banks but now we have only three. Ireland does not need six. You need only two.

“In the case of Japan, we had a very strong manufacturing industry. When Japanese banks were unable to provide credit, they were able to get it from UK, US and German banks. You need some strong core industries to survive. We were able to compensate for the weakness in the financial institutions.”

Taoiseach Brian Cowen has been leading a trade mission of 70 Irish companies to Japan this week as part of the Government’s Asia strategy. The mission coincides with Cowen’s own official visit, and his meeting last night with Japanese prime minister Taro Aso and courtesy call on Emperor Akihito today. It also coincides with Ireland facing at the very least the fallout from the bursting of a property bubble.

On Tuesday morning, Japan-based economist Dr Robert Feldman of Morgan Stanley gave the participants in the trade mission an absorbing oversight of the performance of the Japanese economy in recent years.

Japan finally came out of recession in 2005. Feldman said it did so only when it partly reversed the culture of “forbearance” of the 1990s that created the zombie companies and, in turn, the inertia. For example, a substantial recapitalisation of a bank was agreed by the government on condition that 140 senior executives were fired.

“Forbearance is a way of ignoring or avoiding problems,” said Feldman.

But since last autumn, the economy has, like so many others, experienced a renewed downturn, this time “vicious”, according to Feldman. Interest rates will fall to zero in 2009. Japan’s debt-to-GDP ratio is 160 to 170 per cent. And while Aso did push through a three trillion yen (€25 billion) stimulus package this week, to be distributed to every family in the country to encourage domestic consumption, an opinion poll found that 70 per cent of people were opposed to it.

Aso has only been in position since September and has seen his approval ratings decline rapidly as his government has struggled to handle the downturn. In addition, a general election must be held under law by next September.

Notwithstanding the rollercoaster of the past decade, Japan has recorded some remarkable successes economically and environmentally. Its carbon emissions per GDP are the lowest of all large developed countries. Almost one-third of workers commute by rail. Its use of energy per unit has improved by 1 per cent every year for the past 35 years. “Japan’s accomplishment is stunning in this respect,” said Feldman.

It has also been a huge innovator in technology and this continues apace. With China quite willing to buy technology to improve living standards and energy efficiency, Japan will be well placed to profit handsomely in the future.

From an Irish perspective, the emphasis during the trade mission this week has been on tapping into innovation, technology, and research and development, especially in sectors such as environmentally clean technology (or green tech) and life sciences.

“We have approximately 185 Irish companies in these two areas. These two sectors are not in recession. They are in rapid growth and we intend to get as much behind them as possible,” says Enterprise Ireland chief executive Frank Ryan.

Global innovators such as Toyota and Sony have bucked the trend of the Japanese banks over the past decade. But the signs are that none will escape the winds of change. Sony has recorded its first loss since 1995. More ominously, Toyota is facing its first operating loss in its 71 years in existence as well as substantial lay-offs, as car sales worldwide have slumped.

Against that background, the Taoiseach met his counterpart Aso in Tokyo last night and agreed that both had much shared experience to discuss. Speaking afterwards, he said: “I think that tax revenues in Japan and Ireland have decreased by about 12 to 14 per cent last year. That’s the level they see in their tax budgets. That’s an indication of how uniform the difficulties are right across the board, no matter what the economy is.

“Japan, the second-largest economy in the world, is facing its troubles. We hear on television and radio today that the recession is deepening in the US. Clearly we have a very serious problem that we have to contend with.”

So serious, in some eyes, that it will make Japan’s recession of the 1990s seem mild by comparison.

Irish Times