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Luck is running out
Think of the mighty Japan being bracketed with lowly Botswana, in far away Africa. Yes, it is so in the eyes of the international credit rating agencies. Solvency ratios do not work out in favour of the world’s second largest economic power. Its apparently strong fundamentals can’t tilt the balance.
Japan scores low marks in some of the key areas. First and foremost, is its national debt which is rising. At the end of last fiscal it stood at 157 per cent of the GDP. For comparison, it is only 55 per cent in US and in the European Union 60 per cent is the norm. Under credit rating rules, ownership of the public debt is not taken into account. Tokyo’s contention that 95 per cent of its debt is owned by local institutions does not pass muster with the rating agencies. Though there is nil risk of a capital flight.
Long term, the heavy debt can bite. That is what Japan’s unfriendly critics insist. For Japan’s economy is shrinking. As it has been for the last three or four years. For the whole of 2001, revised government data showed that the nation bore the brunt of its deepest recession in the post-war years. The current year is going to be no better. As per OECD estimate. Japan’s GDP will further contract by 0.7 per cent. On top the 1.2 per cent contraction noted in the final three months of 2001. OECD meekly projects a positive growth for 2003. A modest 0.3 per cent. There is gloom everywhere. Consumption is unlikely to peek up in the near future. There being more job losses when corporate restructuring gets into full gallop. That means household income will drop depriving the economy of the steam it needs to pull on.
Meanwhile Japan’s corporate profit levels are under excessive pressure. Apart form restructuring the falling global demand is taking heavy toll of corporate earnings. Worst hit are Japan’s world famous electronic makers. Air transport, chemical industries and material providers are also feeling the pinch. The former telecom monopoly NTTE, broke the record with a loss of $8 billion. UFJ, holdings a newly formed banking group, hogged the limelight with a swathe of red ink claiming as much as $10 billion.
On the whole, a study of select companies revealed a drop of 40.6 per cent in profit during 2001. A year ago it was up by 38.3 per cent. More important is the fall of 2.1 per cent in sales as against the increase of 4.4 per cent a year ago.
Credit rating agencies (as well as the international business community) continue to break head over Japan’s inscrutable banking problems. Recapitalisation of its banks cost Japan $600 billion for the past 3 years. Even so, no pot of gold could be seen at the tip of the rainbow. Political compromises coming the way of drastic action needed to clean up banks’ balance-sheets. There is no end to the practice of bailing out companies which are terminally sick. The government of course feels alarmed. Being more worried about the growing number of people thrown out of work. On the latest tally, unemployment rate hovers around 6 per cent. A frightening benchmark in a country which could not tolerate even 2 per cent of people out of work at any point of time.
As a result, the anxiety to prop up bankrupt companies is undiluted. Leading to misallocation of credit resources. Corporates’ genuine demand for credit support often could be seen falling on deaf ears. Even otherwise Japan is unlucky. All the plus points accumulated over years now return to hobble its economy. Its huge foreign reserves for instance. Its exchange reserves of $450 billion in all should have jawboned the yen to as high as 85 per dollar or more. But Japan wants the best of both the worlds. It is keen on keeping the huge volume of exchange resources in tact while yearning for a weak currency for the sake of its exports. That boiler plate attitude encourages only the speculators who are ever alert to make money on yen-carry trade.
Lurking down the lane is another danger known all over the world as “hollowing out”. Given the high cost of production in Japan, manufacturing industries are planning to shift production facilities overseas, especially mainland China where labour costs only a fraction and land prices negligible. Among the top companies not even twenty per cent thought of pitching tent away from home ten years ago. Their number has since doubled. Soon it will reach tidal proportions at 80 per cent or so. The likely impact of such migration on consumer spending in Japan can only be imagined.
Economists agree that it is only a matter of time for China to outsell the Japanese industries even in the domestic market. It is feared the Japan’s annual export surplus of $50 billion will evaporate out in the next 5 years.
China is not the only culprit. Falling prices are going to play havoc with the Japanese economy for a long time to come. On the latest reckoning Japanese prices are 30 to 35 per cent higher then they are in America. China only takes full advantage of Japan’s economic stagnation. In 2001, import from China rose 20 per cent. Now its accounts for 15 per cent of Japan’s total imports. A decade ago it was a mere 6 per cent.
One major sign of losing public faith in Japan’s economy is the rising investments in gold bullion. In the second half of 2001, domestic purchases of gold doubled to 43 tonnes as compared with the first half. Investments in gold, in the whole of 2001 were up 25 per cent. This greater than ever interest in gold, is a product of growing risk consciousness in Japan. Inspired mainly by the concern over Japan’s banking system. With state guarantee for the bank deposits going, Japanese are seeking ways to protect their assets. The lure of gold still holds despite the surging price for the yellow metal in the international market. What is to be noted, however, is that Japan’s gold consumption for industrial applications fell by half to 106 tonnes in 2000 and remained flat in the following year.
The credit rating agencies are not the only ones that took note of the slide in Japanese economy. The voters too are going nervous. When he was elected as prime minister Junichiro Koizumi was on the top of the world. Now his popularity has taken a beating even as the voters shifted their savings from bank accounts to bank lockers. It is even said that customers are demanding collateral from the bank for shifting the money back to the S/B account! According to a country wide survey by Japan’s leading news paper, the prime minister’s rating has fallen to 37 per cent. It is the first time that Koizumi’s rating has dropped below 40 per cent since be became prime minister in April 2001.
Koizumi, it may be recalled, promised reforms to clean up the massive bad debt at Japanese banks rein in public spending and hand over ailing state-owned units to private sector. In the event, however, Japan’s decade-long economic slump is far from improving and voters find the prime minister failing to grasp even the magnitude of the crisis.
Coming back to the credit rating agencies, the Moody’s Investors’ Service has gone ahead, down-grading Japan’s credit rating, in late May, for the second time in six months. The agency has found fault with Tokyo for entering “uncharted territory” with high-level public debt. It has found that the Japan’s current and, anticipated economic policies, insufficient to prevent continued the deterioration in its domestic debt position. The new ranking puts Japan in the same league as Cypress, Greece and Lativia. The agency placed Japan’s public debt at $5.4 trillion at the end of March or about 135 per cent of its GDP.
David and Goliath
What shape Botswana, the tiny African country with which the international credit agencies have had the temerity to compare Japan, world’s second biggest economy and the largest aid giver?
Recently Botswana shot into headlines when it reported the highest rate of HIV (Aids) infection in the world. According to Central Intelligence Agency (CIA) estimates, more than 0.35 million of its 1.75 million people are stricken with the virus that causes the disease. Over one-third of population are hit. Half of them are aged between 25 and 29 years. Every hour a baby is infected. And there is no sign of the rate slowing.
With the infection raging at such a high rate the average life expectancy in Botswana has already fallen to 40 years from 60 years. And it is feared that it will sink to below 30 years by 2010.
A sad end of an economy which kept its flag flying for long. It had rock-solid public finances. At 8.8 per cent of GDP in 2001, Botswana has a public debt much smaller than of Japan. Its current rate of growth is 5.5 per cent a year.
It may be a different story a few years hence. The IMF, which sees the economy stop growing soon, predicts the growth rate to fall to 2.5 per cent - still ahead of Japan. Botswana received $8 million in grants from Japan and a sum of $100 million came by way of loans. Over 47 per cent of Botswana’s population live below poverty line (BPL). In Japan, BPL space is blank. Tokyo thus is legitimately enraged. |
