Japanese Investment Opportunities

In any other country - the US, for example - we’d be holding up these ultra-cautious consumers as models of sobriety and responsibility in the face of an undeniable problem. But in Japan things have really gone too far. Our analysts are now telling us that virtually any company that relies on the domestic market for its revenues is unlikely to recover quickly from the present downturn - the only exceptions being the telephone and computer software companies.

When we ask them what they think of Japan’s export-based blue chips, their answers don’t get much easier to listen to: they tell us the weak state of the euro has done serious damage to exporters like Sony, Honda, Nissan or Mitsubishi/Panasonic, and that if the new European currency carries on deteriorating like this (a serious concern, apparently), we may well see the collapse of even very big export
companies.

Japanese Investment Opportunities & Moodys

But Moodys had bigger worries on its mind when it downgraded the government’s debt rating this autumn. Ever since the economic crisis of 1989/1990, successive Japanese administrations have tried to fix the economy by pumping huge amounts of borrowed money into public projects (motorways, bridges, car parks, airports) that have created short bursts of local employment activity but have failed to generate long-term structural growth. The end-result has been rather like a hospital where they feed the patients with glucose drips - they get enough energy, but they also get no proteins, no fibre, no exercise and nothing at all sustainable to carry back to the outside world when they leave.

After ten years and nine stimulus packages, Tokyo is now ¥450 trillion (US$4,000 billion) in debt, or the equivalent of US$33,000 for each man, woman and child in the country. The debt-to-GDP level has now topped 130 per cent, which makes Japan the world’s second-heaviest borrower after the US. But notice the difference between the two. America has enjoyed an almost constant run of strong economic growth on the back of its heavy borrowing, and nowadays its federal budget is actually in surplus. Japan, on the other hand, has merely had ten years in which to get used to subsidies, and it finds itself with nothing to show for them except an awful lot of bridges.

The problem with all this, as far as Moodys is concerned, is that Japan now needs to achieve a medium-term growth rate of at least 5 per cent if it is to justify this amount of trust from the foreign investment markets and cover its own huge debt tails. (Japan has been unable to service its own bond payments out of current government revenues since the early 1980s, so the total debt keeps on growing unstoppably.) Indeed, the problem might be even worse: the Ministry of Finance says the central government debt will grow by another Y200 trillion in the next three years, because it can’t afford to retire the existing bonds when they mature in the very near future - meaning, in effect, that it will have to roll them over into new bond releases.

Japanese Investment Opportunities - Junior Government Officials

Perhaps surprisingly, Moodys big rival, Standard & Poor’s, is taking a rather more optimistic line on the Japanese economy. At present S&P believes the Tokyo government when it says that 5 per cent growth might indeed be achievable as long as Japan deregulates its domestic industries. A big round of one-off efficiency savings might just do the trick, the optimists think, and it might turn out for the best after all.

Japanese Investment Opportunities - Deregulation

More to the point, businesses don’t have a profit-based attitude to what they’re doing: thanks to the rock-bottom interest rates they pay on their bank loans (a relic of the boom-driven 1980s), they’ve acquired a culture in which profitability can be virtually discounted in favour of consistency and market share. It may take many years before Japanese businesses are capable of producing the same pre-tax profit margins that their counterparts in Europe or the US take for granted.

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