Japan is on the mend, but don't expect miracles
Saturday 08 February 1997
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its deep structural problems, etc, etc, while certainly justifying the market correction of the past is now largely out of date.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.
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