Is there any hope for Japan?

November 16, 2009 10:39 am

Carl Delfeld

Carl Delfeld is head of the global advisory firm Chartwell Partners and editor of Chartwell Advisor . He served as a director on the executive board of the Asian Development Bank during the administration of President George H. W. Bush, and he is the author of The New Global Investor . Click here for more analysis from Delfeld, or to subscribe to Chartwell Advisor. click here.

So many investors and analysts are down on Japan that there must be some silver lining and the chance for a very unexpected turnaround. Japan ETFs such as large cap EWZ and small cap JCS have very low expectations going forward. Is this an opportunity?

Part of Japan’s problem is the rise of China and other emerging markets in the region. While China’s GDP has increased tenfold during the past decade, Japan’s has been flat. Still, keep in mind that Japan’s per capita GDP is ten times that of China. That is still a huge gap.

Also, Japan’s traditional strengths such as its educational system, management style, and homogeneous population have all been turned on their head and seen as weaknesses. In addition, no one seems to recognize that its “lost decade” could have been much worse given the magnitudes of the bubbles preceding it. Commercial property prices fell 87% from their peak, golf course memberships fell 95%, and the country’s lost wealth during this decade equaled 3 years of its annual GDP. These are enormous hits for any country to take. For comparison, during the great depression, the US lost 50% of its GDP from 1929-1933.

China’s rise could accelerate Japan’s economic decline as it captures Japanese export markets, and as Japan’s crushing national debt increases and its aging population grows less and less productive — producing a downward spiral.

Some are asking whether Japan is destined to be the next Switzerland: rich and comfortable, but of little global import, largely ignored by the rest of the world.

Consider these facts.

ü The per-capita gross domestic product of Japan, which surged past that of the United States in the late 1980s, topped out at $34,300 in 2007; it is now a quarter below American levels and 19th in the world.

ü Unemployment stands at a record high of 5.7 percent, while prices and wages are falling fast. Japan’s economy shrank at an annualized rate of 11.7 percent in the first three months of the year before recovering to a modest 2.3 percent annual rate of growth in the second quarter.

ü The Chinese economy grew about 10 percent a year for most of the last two decades. Over that period, Japan stagnated as huge public works projects aimed at reviving the economy went toward protecting moribund industries instead of fostering new ones, failing to lift Japan out of its doldrums while creating a huge debt burden.

ü As a result of the global financial impact on Japan’s key export markets, production and exports slumped as much as 40 percent this year.

ü In 1988, Nomura Securities issued a ranking of companies by market capitalization, and 8 of the top 10 were in Japan, topped by Nippon Telegraph & Telephone. Now, not a single Japanese company made the global top 10. Toyota ranks No. 22, at $144.5 billion, and only five other Japanese companies made the top 100.

ü The richest man in Japan, the retailing entrepreneur Tadashi Yanai, was 76th in the most recent global Forbes list, behind moguls from countries like Mexico, India and the Czech Republic.

ü China has also passed Japan in having the biggest trade surplus and foreign currency reserves, as well as the highest steel production. And next year, China could overtake Japan as the largest automobile producer.

ü Annual growth in Japanese gross domestic product averaged 10.4 percent in the 1960s and 5 percent in the 1970s, but only 4 percent in the 1980s and 1.8 percent in the 1990s, according to Goldman Sachs. In the first decade of this century, growth has been even slower.

ü A series of ten stimulus packages and slow growth have led to a gross public debt to twice the size of its $5 trillion economy — by far the highest debt-to-G.D.P. ratio in recent memory. In October 2000 Japan announced another stimulus package of Y11 trillion. Overall during the 1990s Japan tried 10 fiscal stimulus packages totaling more than Y100 trillion and each failed to cure the recession.

ü Just paying the interest on its debt consumed a fifth of Japan’s budget for 2008, compared with debt payments that compose about a tenth of the United States budget.

ü One important difference is that Japan is rich in personal savings and assets, and owes less than 10 percent of its debt to foreigners. By comparison, roughly 46 percent of America’s debt is held by other countries like China and Japan.

ü The IMF expects Japan’s gross public debt to reach 218 percent of gross domestic product (GDP) this year, 227 percent next year, and 246 percent by 2014.
ü Meanwhile, Japan’s savings rate has fallen from 15 percent in 1990 to near 2 percent today, half America’s rate. Japan’s $1.5 trillion state pension fund (the world’s biggest) has become a net seller of government bonds this year, as it must to meet growing obligations. Japan’s labor force has been contracting since 2005.

These trends are not pretty but don’t count out Japan just yet. There are pockets of opportunities and it may find a way back to growth and prosperity. The probabilities of this happening soon are, unfortunately, remote.

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