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The Japanese economy: fragile but improving.

July 7th, 2009 · Greg Atkinson · 4 Comments

It has been hard to write much about the Japanese economy of late simply because the economic data appeared to change every day. But over the last few weeks things do seem to have stabilised and both the government and the private sector in Japan generally agree that the economy probably hit the bottom earlier this year.

This does not mean business is getting back to normal, but at least the fall in demand for Japanese products seems to have abated and there are even signs some domestic demand is starting to pick up especially for hybrid cars. It is still early days, but the view from Japan is not as grim as it was just a few months ago.

The economic indicators are still very mixed. Unemployment has crept past 5%, housing starts still show weakness and the CPI indicates an economy flirting with deflation.  However imports have been on the rise since hitting a bottom in February, bankruptcies appears to be easing and the Production Index is coming off  lows hit in the first few months of the year.

The residential and commercial real estate sector remains weak but there are some signs that the worst is over in this area also. Of course 2009 is hardly going to be a robust year for Japanese real estate but there are probably good commercial properties being sold at prices now, that in a few years will appear to have been bargains.

Land prices have fallen across most of Japan over the last 12 months but so far these falls have not indicated that the nation is on the verge of a property market crash,  although I do wonder how prices are holding up in the resort areas like Niseko.

But more important than the data perhaps is to look at what Japanese companies are doing. For example are they basically just cutting costs and waiting for the economic storm to pass, or are they starting to position themselves for a global recovery?

Recently my scan of the Japanese business news leads me to believe that companies are starting to focus now on life after the economic crisis and are using this current downturn to streamline operations, prepare plans to move into new markets and buy stakes in overseas companies at bargain prices.

I also sense that the belief in the U.S. economy as being the powerhouse that will drive profits for Japanese companies has been shaken. Large corporations like Toyota for example have been reflecting on their push into the U.S. market over the last few years and they seem to be coming to the conclusion that they put too much effort and resources into trying to be big in America.

According to a report released in June by the Ministry of  Economy, Trade and Industry (Japan) the number of people with disposable incomes in Asian nations of between $5000 and $35,000 is now 880 million, and this has grown by 520% since 1990. This is the market Japanese companies are increasingly focusing on and they already have strong positions in most Asian markets including China.

Some Japanese companies worth keeping an eye on are:

  • Toyota – possible quick turn around on the back of hybrid vehicle sales. I suspect that the woes of the U.S car industry will allow Toyota to get a significant head start over it’s U.S rivals in terms of getting hybrid vehicles into the Asian market.
  • NTT Corporation – NTT is trying to expand it’s overseas business operations although it has been trying to do this for years. Still the telecommunications market acorss much of Asia is still pretty undeveloped so there is plenty of potential out these for NTT.
  • Toshiba – I am watching with interest to see how successful Toshiba can be in winning contracts to supply it’s nuclear technology  to a number of countries now planning to construct new nuclear power plants. If there is a major resurgence in nuclear power than this could be a very lucrative business for this company.

Australian business reporting seems to focus entirely on the Chinese economy but China is not Asia.  There are around 4 billion people in Asia and the region accounts for approximately 60% of the world population, so although China is a big part of the picture it is not the only part.

If the 21st century is to be the Asian century then the whole region needs to move ahead and if this does happen, the U.S. will slowly become a less influential force in Asia both economically and politically.  In 20 years time a major recession in the U.S. may no longer send shock waves through the  Asian economies and Japan might be better able to better withstand a downturn in U.S demand for it’s products.

Japanese companies are also positioning themselves to take advantage of the global push for cleaner energy.  Toshiba for example is expanding it’s nuclear power business so it now can not only build the power plants, but also supply the fuel  for these plants. Mitsubishi Heavy Industries is gearing up to build clean coal power plants and every week I read articles about how companies are racing to develop a range of clean energy solutions.

In addition Japan and Russia are slowly moving ahead with deals so that Japanese technology and expertise can assist Russian companies tap into the vast natural resources from Siberia to the islands just to the North of Japan. (even if the ownership of these islands is an unresolved issue left over from the end of World War 2)

Russia can supply Japan with LNG, natural gas, iron ore, uranium and wheat so Australian exporters of these commodities might find the trading environment  for these commodities a little more competitive in the years ahead.

One positive that has come out of this economic mess is that there are far less loud foreigners lecturing the Japanese about how to run their companies these days.  Also American bankers who just a few years ago were telling the Japanese banks that they should loosen up their lending practices  seem to have almost vanished.

There is no doubt that corporate governance in some Japanese companies could be improved but I do not think these companies should be taking too many lessons from the U.S.  At least Japanese executives don’t fly in private corporate jets to meetings looking for government bailout money!

The path out of this recession in Japan will be long and require some further painful adjustments but I believe that Japanese companies are generally making the right decisions now, that will allow them to move with Asia into another era of economic growth. The Japanese long term planning approach does sometimes cause  short term pain but over the longer term, the focus on creating innovative quality products that the world needs will probably turn out to be a winner.

4 responses so far ↓

  • 1 Pete // Oct 27, 2009 at 3:07 pm

    Japan faces debt tsunami
    “It is hard to see how Japan could avoid a government default or hyperinflationary currency death spiral”

  • 2 Greg Atkinson // Oct 27, 2009 at 5:45 pm

    William Pesek from Bloomberg always seems to be writing something gloomy about Japan. The old debt default story pops up every few years but Japan Inc. rolls on.

    I reckon it is a bit too early to get worked up about what the new government will or won’t do. If they make no effort to get debt under control in the next few years then I might get worried, but for now I am more concerned about the U.S economy.

  • 3 Pete // Oct 28, 2009 at 12:14 pm

    Fair enough.

    I don’t know much about Japan, but I feel that Japan will be unfortunately tied to the fate of the US, at least partially.

    Also to the fate of Europe, but that is a tricky one (Europe is somewhat diverse).

    I think in ten years time we will look back at the 2007-2012 period and think “wow, I didn’t think THAT would happen”.

    Predicting the future of global economies is tricky.

  • 4 Greg Atkinson // Oct 28, 2009 at 12:32 pm

    Pete I reckon you are exactly right about trying to predict the future of the global economy. One thing for example that economist’s cannot get their heads around is technology and it makes a huge difference. Trying to map out where will be in 10 years based primarily on the technology we have now simply doesn’t work and the fact is we have no idea what may pop up in a few years time. By now we are suppose to be all working in paperless offices 🙂

    In 10 years time a united Europe could become the centre of the world again or maybe India will all be the rage and China’s glory days will be behind it? Who really knows? (not me that is for sure!) Remember the Asian Tiger economies? At one stage they were supposed to be taking over the world but the Asian financial crisis put a hole in that plan.

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