Musings of the Sundarman

Japan: A Looming Recession
Republished with permission from Stratfor, Inc.

Japan’s economy has likely fallen into recession, Shigeru Sugihara, chief business statistician in the Cabinet said Aug. 6. The country’s complete dependence on the outside world for energy and essential goods, combined with its debt-addicted fiscal policies and an impending demographic crisis could spell economic disaster — or at least a protracted and deep slump.

Analysis

Japan’s economy has likely succumbed to a new recession, the Japanese Cabinet’s business chief, Shigeru Sugihara, said Aug. 6, concluding five years of economic growth for the world’s second-largest economy. Japan’s sixth recession since 1992 will push the country even closer to the inevitable economic disaster it faces as a result of its skewed financial system and utter dependence on foreign energy and commodities.

The recent history of Japan’s economy is one of deep debt, multiple recessions and government bailouts funded by deficit spending. After World War II, Japan’s economy got up and running by means of banks happily giving big loans to domestic companies while offering consistently low interest rates to all borrowers. The idea was to jump-start Japanese business with easy cash and, most importantly, to employ as many people as possible to ensure social stability. Over time, this emphasis on high employment led to a relative de-emphasis on efficiency and profit. Freely flowing credit kept everyone afloat. As corporations grew by borrowing more and more money, the fates of banks became tied to the corporations they were supporting. With wide and easily available credit for all, numerous rich buyers bid up the price of everything, especially property, until the bubble burst in 1991 and recession followed.

The 1990s consisted of a series of recessions and publicly funded stimulus packages to restart growth. As soon as these measures expired, recession returned, and the cycle repeated itself. Despite attempts at reform under former Prime Minister Junichiro Koizumi, Japan has continued its policy of extravagant deficit spending to promote massive public projects — notably infrastructure renovations — to keep people working. Meanwhile, it has accrued more and more debt, eventually ballooning total national debt to somewhere near 150 percent of gross domestic product. At the same time, the Japanese consumers’ reluctance to spend money has led to low demand, cuts in production, layoffs and a nearly-decade-long deflationary spiral.

The current downturn follows from the sharp rise in global commodity prices in late 2007 and 2008. Inflation driven by high food and fuel costs has hurt the country because Japan is far more dependent than other Asian economies on the outside world for its essential commodities, including all of its energy and the raw materials that supply its manufacturing sector. The ever-climbing costs of basic necessities have stunted economic growth rather than encouraging it by spurring demand. Hence, the onset of recession.

Short of completely reinventing the country’s economic system, which would entail a social revolution and could plunge the country into anarchy, Tokyo has only a few possible options — none good — to buy time and stave off its worst fears. First, banks can lower interest rates even more, down to as low as zero percent, to make the loans even cheaper and hopefully spur more economic activity. Second, the government can tinker with monetary policy — specifically buying dollars and selling yen, as well as expanding the money supply — in order to devalue its currency, thus boosting its export sector and attracting foreign markets eager to take advantage of a “cheaper” Japan. Third, Tokyo can launch another massive publicly funded stimulus package. Japanese Prime Minister Yasuo Fukuda will announce just such a package in mid-August, but no one knows whether it will be as big as the ones that were customary in the 1990s.

The long-term outlook for Japan, however, remains bleak, as these choices represent the very cause of their financial ills in the first place. Japan’s economic system is unsustainable as long as job security is privileged over efficiency and profit. Compounding the bleak economic forecast, Japan faces a demographic crisis of the highest order. The population, currently at 127 million, is shrinking rapidly; by the end of the century, two-thirds of it will have disappeared, leaving the country with only 42 million people and a shortage of workers and a high number of dependents. While Japan has taken steps to bring in foreign workers and enable migration in key sectors, the specter of demographic shrinkage makes an economic renaissance far from likely. The latest recession may not last long, and may not drive the world’s second-largest economy to financial ruin — but it probably is the best that can be expected for Japan’s overall economic performance in the 21st century.