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
So junior government officials have been spending the last year
engaged in a door-to-door bond-selling campaign, aimed at persuading
housewives to invest their surplus cash in bailing out the government
yet again. They’ve been trying not to convey their utter
anxiety about what will happen if Japan should fail to cover its
new borrowing needs; but it seems clear that Tokyo would be completely
at the mercy of the international markets when it came to setting
out the terms for any future bond issues - and that wouldn’t
be good for Japan or its future growth prospects.
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
What do we mean by ‘deregulation’ here? Isn’t
Japan already a free-trading nation? Well, hardly. On the domestic
side, consumers routinely pay up to three times as much as they
need to for their household goods, because the country’s
wholesaling and distribution system is stitched up by a handful
of large companies which dictate prices. The internet and e-commerce
is slowly eroding this archaic system, much to the delight of
foreign competitors, but there’s still a long way to go.
On the business side, companies remain locked into restrictive
labour agreements with their workforces which still make it far
too hard to sack surplus staff (though this, too, is changing).
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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