The torrent of bad economic news about Japan washing through the media in recent weeks is reminiscent of a once-skilled boxer being beaten up at the end of his career. But unlike such a boxer, Japan has a chance of rejuvenation. Investment bankers in Tokyo, who have been coping with severe losses in their workforces this year, should take note that they could be major beneficiaries.
The US model of capital markets-driven economic growth has one fundamental reason. The US runs the biggest trade deficit in the world as a percentage of GDP and needs to sell or borrow foreign assets in order to pay for those goods. So the US attracts funds from abroad and its investment banks mediate the funds through the capital markets, selling bonds, equities and associated derivatives to foreign investors.
In contrast, Japan is financially self-sufficient thanks to decades of cash savings and export surpluses. Domestic savings (the sum remaining after domestic investments) are recycled abroad, resulting in Japan's long-running current account surpluses (and by the same token, domestic capital account deficits which cancel out the current account surpluses).
But several trends are conspiring to strip Japan of this thick plating of financial muscle, behind which it has played out a bizarre and unique model of 'feudal capitalism' -- in spite of the conviction of many Wall Street bankers that such a system cannot work. Well, despite being proved wrong for 50 years, the bankers could still be right.
The crux is that Japan is getting poorer by almost any measure. GDP, chronically weak for almost two decades, went negative to the tune of 13% (annualised) in the fourth quarter of 2008. The era of huge current account surpluses -- it reached 3.2% of GDP in 2006 -- could be reversing: January saw the first monthly deficit in 13 years as exports dropped by 50%, the biggest drop since the oil crisis 35 years ago. Most strikingly for a North Asian country, the savings rate is shrinking exceptionally fast. In short, Japanese savers are increasingly less able to export capital to America (or China) to buy Japanese goods.
The lower savings rate is due to Japan's ageing population (fewer people earning incomes). Citizens are being forced to spend their accumulated wealth. The household net savings rate as a percentage of disposable income has, according to the OECD, collapsed from 12% in 1998 to 3.3% in 2005, and close to zero this year, according to some sources. That's considerably lower than even Italy (10%) and Holland (8%).
The poor economic statistics are partly sparked by the global financial crisis, in particular a stronger yen. But there is little doubt that industrial over-capacity; a shrinking workforce; low total factor productivity compared to Western countries; and sinking individual incomes/declining savings rates, are structural issues.
What will concern the government is that the current situation, where Japanese government debt propping up GDP is issued domestically to unresisting institutional investors, could change. As Japan's wealth bleeds away, the government will have to attract foreign capital, or see GDP decline. Such a strategy will only come if foreign investors see growth and open, welcoming markets.
The solution for Japan could thus be similar to the path chosen by the US, where foreign resources are welcome to make up for its domestic capital and skills deficiency. The ongoing crisis proves that this can be taken too far. Too much capital and flawed business models have created an asset bubble and excess leverage in the US. But even a fraction of that openness, if implemented in Japan, could provide the economy with a welcome new dynamism.
