It’s hard to get excited about Japan falling into recession—again. It’s a recurring experience for Asia’s biggest economy for more than 15 years now. The nation’s 127 million people have also perfected the art of living with declining growth, and doing so quite well.
That helps explain why investors were unperturbed by the news Japan’s gross domestic product shrank an annualized 0.4% in the quarter ended 30 September, even though economists predicted it would grow 0.1%. While some expressed surprise that the GDP is now formally shrinking, investors know Japan will ride this out better than the US.
Yet this recession will have more long-term consequences for Japan than the last one in 2001.
Germany’s contraction, confirmed last week, will also be harder on that nation’s 82 million people than their Japanese counterparts. Germany’s unemployment rate is 7.5%, compared with 4% in Japan. Japan is uniquely equipped to muddle through the global crisis because of its roughly $15 trillion (Rs745.5 trillion) of household savings.
Even in the darkest days of deflation during the 1990s and 2000s, there were scant visible signs of distress. Visitors, especially those in the financial industry who understood the depth of Japan’s plight, would marvel at how pricy restaurants were full and Louis Vuitton still doing brisk business.
This time may be different. Many Japanese could be excused for wondering if they have been unwittingly cast in the sequel to the 1993 movie Groundhog Day. It’s the story of a television weatherman forced to relive the same day over and over again until he gets it right.
Since the start of the 1990s, Japan’s recoveries have fizzled like one bad rerun after another. The latest episode is no different, even if Japan can partially point a finger at the credit crisis. As global growth slows, Japan will perform even more below its potential.
What makes this plot so familiar is how policymakers squandered the growth of the last seven years. The ruling Liberal Democratic Party (LDP) did little to wean Japan off massive borrowing and ultra-low interest rates. It did little to prepare for a rapidly ageing population and declining birth rate. It failed to encourage the entrepreneurship Japan needs to maintain its high standard of living.
Bottom line, the LDP didn’t fix its leaky roofs when the sun was shining. Now that the world economy is raining bad news, it’s paying the price. One wonders if it may pay a bigger price than Prime Minister Taro Aso realizes.
Aso is proving to have some decent economic instincts. He pledged Japan’s support for stabilizing global growth and is providing $100 billion to bolster the International Monetary Fund’s coffers. Aso’s real challenge is cushioning Japan from the worst crisis since the 1930s.
Public-opinion polls show that most Japanese disapprove of his performance. It means that as Aso tries to stabilize growth, he’s also under pressure to call elections. Expect more of the kinds of stimulus efforts that shackled Japan with the largest public debt among developed nations.
Japan is better positioned in the short run to weather global turmoil. Its companies shed debt and streamlined labour forces since the property bubble burst in the early 1990s. The problem is the long run. Graying Japan has little time to waste preparing for a powerful, destabilizing and expensive demographic shift.
Some of the policies helping corporate profits today may hurt them tomorrow. Efforts to increase the prevalence of part-time work contracts, cut state pensions and raise health insurance premiums are accelerating the creation of the kind of underclass few expect in Japan, particularly among women. That could hurt consumption over time.
As political science professors such as Aiji Tanaka at Tokyo’s Waseda University point out: “Aso’s popularity is dropping because his policies are short-sighted, unfeasible and just aimed at boosting his approval rating.”
Banks are also entering a difficult period. They avoided the toxic securities that blew up Bear Stearns Companies Inc. and Lehman Brothers Holdings Inc. Yet success can be fleeting in today’s chaotic world. Look no further than Mitsubishi UFJ Financial Group Inc.’s $9 billion investment in Morgan Stanley. Now it’s planning a 990 billion yen (about Rs51,480 crore) stock sale that will dilute shares. Japan isn’t about to slide into crisis. Its vast resources are a cushion others lack. When Japan should be raising its game, though, it will be more and more preoccupied with preserving the status quo.
Welcome to Groundhog Day, Japan style. In the film, a character played by Bill Murray goes to Punxsutawney, Pennsylvania, to cover the annual Groundhog festival. He wakes up morning after morning on the same day, at the same moment, to the same cheesy song playing on the radio. That is, until he changes his ways and learns the meaning of life. The sense of repetition is also strong for those who ploughed back into Japanese stocks in recent years, believing this time things really were different. Only bold action in Tokyo will stop this story from repeating.
Japanese voters have every right to be frustrated with their days of waking up to same disappointing economic news day after day, year after year. Murray’s film is a comedy; Japan’s storyline is anything but.
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