Jeremy Warner: Japan's land of the setting sun

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The Independent Online

Outlook The sun has been setting on the Japanese economy for the best part of 20 years, but over the last few months, the country has been plunged into deepest darkness. Ironically, it is looking as if the big surplus nations are going to be even more severely hit by the global recession than profligate deficit countries. Things look equally grim in Germany, another economy whose heavy reliance on manufacturing and exports has made it particularly ill equipped to withstand the present, crippling collapse in demand. In lecturing us Anglo-Saxons on the dangers of our credit-fuelled spending, they seem to have plain forgot that it was German BMWs and Japanese Toyotas we were spending our ill-gotten debts on acquiring. German and Japanese exporters were as much beneficiaries of the credit boom as the London housing market.

Exports from Japan last month suffered a near 50 per cent plunge, leading to the country's worst ever trade deficit, which is in itself an extraordinarily rare event. It's small wonder that Japanese representatives at recent meetings of the G8 and G20 have been screaming at the world to reflate and act urgently to resolve the banking crisis. Failure to grip the crisis that engulfed Japan's banks in the early 1990s prompted nearly two decades of subdued domestic demand and consequent deflation. But at least the rest of the world was still growing, helping to sustain Japan's export industries. The Chinese boom of recent years has further underpinned Japanese exporters. All that's now gone. Global demand has come to mirror that of Japan's own economy.

The only consolation in this extraordinary about-turn in Japan's trade position is that the yen, which had become cripplingly strong for a country that relies so heavily on exporting, has finally begun to weaken markedly. Not that it will bring much respite. The weakness of the pound here in Britain has had zero impact so far on our manufacturing industries, which contracted at a record pace last quarter. Manufacturing can be as competitive as you like, but it will still struggle to sell in a world where demand has fallen off a cliff.

There's an obvious read across from Japan to Germany. Both Japan and Germany have managed to avoid the build-up of private debt seen in the the US and UK. But both start the downturn with much higher levels of public borrowing, limiting their ability to provide meaningful fiscal stimulus.

In Japan at least, that may not be too much of a concern. Japan has been able to borrow huge amounts of money, as well as engage freely in quantitative easing, without it having any noticeable effect on the government's ability to borrow. Bond yields in Japan have remained extraordinarily subdued, despite the growth in public debt. Yet there must be limits.

Once the present inventory adjustment is over, industrial

production in both Germany and Japan will bounce, leading to a possibly quite sharp revival in growth. The present road crash in production and exports is as much about running down stocks to adjust to lower levels of demand as the underlying demand itself. Eventually the process will come to an end and factories will start producing again, albeit for rather lower sales than previously prevailed. Even so, without a recovery in global demand, any bounce is likely to prove quite short-lived.

Britain's economy may have become too reliant on finance and other service industries. Yet, as is now apparent, large-scale manufacturing sectors are no panacea either. Maybe Britain's "unbalanced" economy wasn't such a bad idea after all. In any case, the hope expressed by British policymakers that trade and investment can compensate for weakness in the consumer economy looks like just wishful thinking. If Japan and Germany are struggling to find buyers for their goods, what hope for us? Let's stick to the mixed, post-industrial economy we've got.