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Outlook for the Japanese economy in 2009.

January 28th, 2009 · Greg Atkinson · No Comments

There is no doubt that the Japanese economy is suffering as a result of the global economic crisis. However much of the reporting in the western media is at best poor journalism and at worst, simply wrong.  So rather than focus on sensational attention grabbing headlines, let’s look at some forecasts and facts.

Japan is an export driven economy; so when global consumption slows the Japanese economy feels the pain more acutely than many other economies. Remember that Japan is what I would term a truly global country, Japanese companies have significant operations all over the world. From car manufacturing plants in the United States to oil exploration off the coast of Africa,  Japanese companies are everywhere.

Often people simply do not realise that a famous brand is Japanese (such as TDK or Pioneer) , know that Sony has an American chairman and employs around 180,000 people across the globe or that Westinghouse Electric (a world leader in nuclear technologies) is majority owned by the Toshiba Group. It may also interest you to know that the Japanese company with the most staff is not Toyota, but Hitachi with a global workforce of around 355,000 people.

So what is the outlook for the Japanese economy in 2009?  Well in October 2008 The OECD summarized the situation as follows:

“External shocks from the run-up in commodity prices and then international financial turbulence have brought Japan’s expansion to an end. Equity prices have plummeted and the yen has appreciated substantially. With falling exports, activity is projected to remain weak through 2009, pushing up unemployment and reducing headline inflation to near zero. A recovery in domestic demand is projected to lift output growth to around 1% during 2010, still short of the growth of potential.’

The global economic situation since that report was issued has become worse so we can expect 2009 to be a tough one for the Japanese economy. Therefore I would suggest that the forecasts in the OECD Report from October could probably be adjusted down in some areas. For example the OECD expects exports to fall by 2.9% in 2009 (they were up 8.6% in 2007) whereas I guess the figure will end up being a drop of more than 3%. 

Other forecasts from the OECD for Japan in 2009 have GDP falling by 0.1%, imports gaining at 1.2% and total domestic demand flat at just 0.6% growth. It would not be surprising to see imports fall below 1% growth, although the strong Yen is currently driving demand for some imported goods.

Trade with China and the United States is critical to the Japanese economy. China is now Japan’s largest trading partner but the United States is still a very important market and perhaps the most important psychologically. If the U.S. economy shows signs that it has reached a bottom in 2009 then we should see an improvement in the market in Japan and this would suggest we will reach the OECD output growth forecast of 1% in 2010.

Over the last few years many foreign investment companies started to buy into Japanese stocks and real estate. Sadly their timing was not good and many of these companies will be looking at large losses and may even have to exit the market. However the current downturn in Japan might provide savvy investors a good time to gain exposure to Japan if the global economy starts to recover from 2010.

I am not suggesting anyone rush out and invest in Japanese stocks etc., but if you are interested there are ways to invest in Japan via managed funds or via an Exchange Traded Fund like iShares MSCI Japan. (ASX: IJP)  As always do plenty of research and seek professional advice as needed. Probably the biggest barrier to investing in Japan at the moment is the strong yen as the Australian dollar does not have much buying power in the land of the rising sun these days.

Be wary of much of the business reporting coming from Japan at the moment. The current Prime Minister of Japan (Taro Aso) is not a popular chap and the opposition parties are pushing for an election to be called. This has the Japanese media in election mode and so stories of economic gloom and doom get extra focus. Western journalists and news organisations often just reuse what the Japanese press dishes out and so you can get a very distorted view of what is happening.

It is true the current economic situation in Japan is not good, but there are no large crowds of unemployed people wandering the streets and company lay-offs have not been anywhere as severe as the United States for example. Japanese companies are far more reluctant to lay off staff than their western counterparts, curiously some western business leaders see this as a sign of bad management but are happy to pocket millions as their own companies go under. Personally I see the Japanese reluctance to shred workers as honourable.

Finally on a somewhat lighter side, it has been suggested that the current economic downturn in Japan may help boost the population. The reason for this is that overtime is being cut in many firms and workers are being urged to spend more time with their families and make babies. So perhaps 2009 might be a bad year for the economy, but it might just give Japan a much needed baby boom!


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