Japan is on the mend, but don't expect miracles

The Japanese, a bit like the British, are by nature a pessimistic lot and no more so than now. Not so long ago someone in Tokyo came up with an expression to describe this mood of unrelenting gloom - "Japan bashing, Japan passing, Japan nothing". Plainly this loses a little in the translation for the Japanese themselves seem to find it highly amusing. What it seems to mean is that first Japan goes through a period of great self-doubt and viciously flagellates itself for its economic failings, then it is overtaken by the up and coming Tiger economies of the Far East, and finally Japan is nothing once more.

Since the beginning of the 1990s, the Nikkei has plunged from a high of nearly 40,000 to little more than 18,000 today. Since the beginning of this year alone, it has fallen by 10 per cent in sterling terms. The question for foreign investors is whether this apocalyptic saying is actually true, or whether it is just a backward-looking piece of nonsense, more reflective of the past than what's going on now. In other words, are the Nikkei and the yen going to continue plunging into the abyss or are we now set on a path of gentle recovery?

Here are two very conflicting views. The first comes from Ken Courtis, vice-president of Deutsche Bank Capital Markets in Japan. It would be hard to find a more international perspective than his for he is an American, based in Tokyo, working for a German bank. He takes the optimistic view. All this stuff about the banking crisis, Japan's growing lack of competitiveness, its deep structural problems, etc, etc, while certainly justifying the market correction of the past is now largely out of date.

In fact leading Japanese multinationals have never been stronger, either financially, technologically, or in terms of international market penetration. To back up his case he cites a recent $1.2bn eurobond issue, raised by a leading Japanese car maker on a coupon of a mere 1.8 per cent. Ford is meanwhile paying 7.5 per cent on 10-year money for its new plant in India. In other words Ford pays $550m more over 10 years for its capital than the Japanese company - quite a competitive disadvantage. And we are told that Japan, the world's second- largest economy, is dead.

Furthermore, the depreciation of the yen over the last year and a half, pursued as an act of policy by Japan in partnership with the US, is leading to a very significant improvement in Japanese export performance. The Japanese financial crisis, a direct result of the stock and real estate investment bubble of the 1980s, is now largely over. Indeed the recovery is already sufficiently strong for the government to be able with confidence to apply some strong fiscal medicine. As a consequence the process of rebuilding the public finances is well under way.

The next phase is that of deregulation of the Japanese economy. By the end of the year, exchange controls will have been swept away. Free trade, flexible labour markets, structural change, all these things are coming. And so on and so on. As you might have guessed by now, Mr Courtis is a buyer, both of the yen and the Japanese market.

For a rather less ebullient, and, I suspect, more realistic assessment, turn to Yutaka Kosai, president of the Japan Centre for Economic Research and a former senior official at the Japanese Ministry of Finance. His is an unpopular view in Japan, but a compelling and simple one, none the less. Japan, he argues, is reduced to growth rates of no more than the OECD average, which is very modest by comparison with the country's glory years.

Successful structural reform is the only way out of a vicious circle of fiscal and monetary tightening. This in turn will bring very significant short- to medium-term problems with many companies in the protected service, construction and financial sectors finding it hard to survive. The banking crisis is most certainly yet not over. Moreover, there are some very worrying long-term demographic trends in Japan which would appear to rule out anything approaching a return to Japan's glory years. By the year 2010, Japan will have the most aged population in the world.

There is nothing particularly surprising about all this. Many of these problems are present in equal measure in the European economy too. The difference is that even at present depressed levels, Japanese stock prices are buoyed by valuations which in price/earnings terms are often double those of their US and European counterparts. Can this really be justified?

Unless the Japanese stock market meets Wall Street coming in the other direction - which is not altogether inconceivable given the heady rate of progress the other side of the pond - it seems hard to believe. Pedestrian growth rates and progressive integration into the global economy are not the stuff of a rip-roaring Japanese bull market. Mr Courtis has had some good calls on the Japanese market, but I know where I would put my money - with Mr Kosai.

The fortunes of the lira and the Italian bond market are curious objects of obsession for the British press, for unless you happen to own a house in Tuscany, the ups and downs of the Latin economies are about as relevant as a ten-bob note.

Oh no they're not, scream the City pages of Britain's predominantly Euro- sceptic press, for these economies are about to be incorporated in the euro and that's what's so wrong with this grand projet, you see. All this convergence in European currency and bond markets is a load of politically driven nonsense contradicted by underlying economic realities. It's bound to end in tears as the traders of London and New York finally get their way and correct this absurd, EMU-inspired aberration, they say.

Far be it from me to comment on these weighty matters, but is it not the case that cleverer Anglo-Saxon traders have actually been the ones making an absolute killing out of the "convergence play", as this phenomenon is known. You can bet your boots they will on the downside too, if and when it comes. For them the gathering pace of debate around the euro is just another trading opportunity, no more, no less.

Citing "the markets" to support your case, as if they were some all-seeing, all-powerful godhead, works both ways, for at the moment the markets point towards a successful euro; they don't support the Euro-sceptic case. The truth of the matter is that successful traders ride the wave until they think it about to break, and then they duck back to create another. It is actually no more complicated than that.

As for the Italian currency, most Brits will continue to think there are really only three words for it, the ones famously used by Richard Nixon at the height of Watergate. If you don't know what I mean, look it up in Bernstein and Woodward's book, for we are a family newspaper here.

Start your day with The Independent, sign up for daily news emails
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Guru Careers: Communications Exec / PR Exec

£25 - £30K: Guru Careers: We are seeking a highly-motivated and ambitious Comm...

Guru Careers: Pricing Analyst

£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

Day In a Page

On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific
In this the person to restore our trust in the banks?

In this the person to restore our trust in the banks?

Dame Colette Bowe - interview
When do the creative juices dry up?

When do the creative juices dry up?

David Lodge thinks he knows
The 'Cher moment' happening across fashion just now

Fashion's Cher moment

Ageing beauty will always be more classy than all that booty
Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination

Health fears over school cancer jab

Shock new Freedom of Information figures show how thousands of girls have suffered serious symptoms after routine HPV injection
Fifa President Sepp Blatter warns his opponents: 'I forgive everyone, but I don't forget'

'I forgive everyone, but I don't forget'

Fifa president Sepp Blatter issues defiant warning to opponents
Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report

Weather warning

Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report
LSD: Speaking to volunteer users of the drug as trials get underway to see if it cures depression and addiction

High hopes for LSD

Meet the volunteer users helping to see if it cures depression and addiction
German soldier who died fighting for UK in Battle of Waterloo should be removed from museum display and given dignified funeral, say historians

Saving Private Brandt

A Belgian museum's display of the skeleton of a soldier killed at Waterloo prompts calls for him to be given a dignified funeral