The... economic boom went on until it reached a climax…, with record levels of bank lending to construction and property, sky-high share and property prices and the emergence of overcapacity in key industrial sectors such as... automobiles. The lack of proper accountability in the banking system, the insider crony networks of lenders and borrowers, the intimate and frequently corrupt involvement of the government bureaucracy in so much of the economy—in short, a lack of economic and political pluralism, together with weak accountability—finally undermined the… miracle.”
Well, I did not have access to a time machine and hence did not see myself typing away these comments for Mint in July 2009 or 2010 on China although the relevance to what is going on there is uncannily close. These were words taken from the book, The writing on the wall, by Will Hutton as he described Japan of the 1980s and 1990s.
The fact that this book describes the current economic boom conditions in China is not accidental. China has taken a leaf out of Japan’s post-war economic transformation and hence its reliance on a competitive currency, export-led growth, and so on. Therefore, the path that the Japanese economy has taken since the boom days of the 1970s and 1980s should be of interest and concern to the People’s Republic of China.
Japan presents an interesting case of efficiency in production and clumsiness in its political and economic affairs. Pork-barrel politics is just one bad growth-year away. The recent political scandal involving redesignation of pension funds is threatening to cut short the political life of its prime minister, while the macroeconomy is clearly losing fizz, and the expansion, after five years of halting growth, is at the risk of sputtering to a halt. In 1997, there was an attempt to consolidate pension funds into one account. It appears that the exercise was carried out so badly that millions of pension accounts are now untraceable. The public is aghast. There might be an impact on the forthcoming upper house elections due to be held on 29 July. Prime Minister Abe has already accepted responsibility for the outcome of the elections. This means that if the ruling Liberal Democratic Party is unable to hold on to its already wafer-thin majority, Abe might become a victim of the result. Expectations are that, in such a case, the party might fall back on an old-style fixer. The country’s approach to change in the 21st century appears hesitant and unconvincing. Economic reforms, in a conservative society, call for a strong man at the helm.
The Tokyo Stock Exchange, with its relatively underdeveloped trading and settlement systems, is no longer the dominant force in Asia and risks losing its pre-eminence to Hong Kong or Singapore or even Mumbai in the not-so-distant future. The economy is struggling to find a second wind after its initial bounce when the stagnation of the 1990s ended around 2002. Labour incomes are shrinking. Confidence among small businesses has stalled for over two years and the stock market is starkly underperforming other regional markets since 2006.
The government, in part rightly obsessed with fiscal stability, has withdrawn some personal income-tax rebates and reliefs. With interest rates very low, the public is happy to send money abroad in search of higher yields. The “carry-trade” is carried out more by Japanese residents than by speculators and hedge funds. In fact, there is merit in the contention that if interest rates are increased in Japan (they currently stand at 0.5% per annum!), it might put more money into the pockets of depositors rather than choke economic recovery. Nonetheless, both the nominally independent Bank of Japan and the country’s politicians are hesitant to risk higher rates. That keeps the yen weak and increases the risk of protectionism from the West, as both China and Japan are relying on export growth facilitated by their respective cheap currencies.
Japan’s floundering economy and lack of political direction are missed opportunities to rebalance the global economy, to provide ballast for the regional economy and to set an example for China. The risk to the global economy from any potential fallout of the problems in the US housing sector affecting consumption spending in that economy is not small. If that risk materializes, there are not too many fallback options. At the beginning of the year, there were hopes that the Japanese recovery would find support in accelerating domestic consumption after having been held up by capital spending in the previous three to four years. That has not happened.
The missed opportunity of the Japanese recovery might be judged a bellwether for the unbalanced global economy by historians as they write the economic history of the first decade of the new millennium.
V. Anantha Nageswaran is head, investment research, Bank Julius Baer (Singapore) Ltd. These are his personal views and do not represent those of his employer. Comments are welcome at firstname.lastname@example.org