Optimism in Japan gives way to fears of a market collapse

Is Japan about to sink into a fresh deflationary spiral, with catastrophic consequences for the world economy? Barton Biggs, Morgan Stanley's legendary stock market guru, is advising clients not to wait any longer for that elusive recovery in the Tokyo market and cut their losses. Richard Lloyd Parry assesses Japan's growing economic ills and finds that remedies are in short supply.

To casual foreign observers, the popular notion that Japan is on the verge of a recession has often seemed a laughable one. For all the genuine gloom here, and for all the big changes that are taking place within the Japanese economy, Tokyo still looks, smells and feels like one of the richest and most confident cities in the world.

All over the capital, buildings are torn down and thrown up again in an endless orgy of construction; in the streets immaculate teenagers still clutch pounds 500 handbags. At 3.5 per cent, unemployment is still the lowest in the industrialised world, and growth last year was the highest since 1991.

Since the bursting of the bubble economy in the early 1990s, Japan's re-entry into the real world has brought relative hardship - but to any European who lived through the economic slumps of the 1970s and 1980s, the self-pity which has enveloped Japan for the last two years has looked very like the sulk of a spoiled brat which had its own way for too long.

Even if the pace does not satisfy everyone, the government of Ryutaro Hashimoto has at least begun the job of reforming Japan's financial institutions and exposing them to much-needed competition. The country's banks have gone a long way to writing off the bad debts left over from the collapse of the bubble.

Last spring, the government's cleverest economist, Eisuke Sakakibara, put it into words when he spoke of the country's "irrational negative exuberance", and for a brief few weeks, Japan began cautiously to chirp up a little. Half a year later, that delicate dew of incipient confidence has evaporated completely, in the heat of a stiflingly dramatic summer.

Brave optimism has given way to almost unanimous pessimism in Tokyo: the question is no longer when the long-awaited recovery will get under way, but whether the stock market can pull itself out of a downward spiral which could have grave consequences far beyond Japan. After years of waiting for a rebound in the Tokyo stock market, many foreign investors are giving up on the country and ordering big reductions in their exposure.

The crisis has been precipitated by the wave of currency devaluations which swept through South-east Asia this summer, beginning in Thailand and spreading quickly to the Philippines, Malaysia, Indonesia and now South Korea.

The currency drama is taking its toll on Japan in two ways. For a start, there is renewed pressure on Japanese banks, whose Asian creditors suddenly find the cost of their yen-denominated loans soaring. And secondly, the country's exports are suddenly extremely expensive in countries where spending, both corporate and consumer, is being cut back anyway.

Some 46 per cent of Japan's exports go to Asia, and two-thirds of these are demand-sensitive goods. As their currencies have plummeted in value, Asians have less money to spend all round, and less inclination than ever to spend it on imported goods. South Korea, for instance, accounts for 7.1 per cent of Japan's exports: for every 1 per cent decline in Korean GDP, the amount of Japanese goods the county imports drops by more than 3 per cent.

According to Jesper Koll, chief economist of JP Morgan Securities in Tokyo, the decline is Asian growth will cut Japan's exports by 7 per cent in the coming year. Reduced exports will lead to reduced production, lower corporate earnings and then to reduced wages, overtime and finally reduced employment levels.

And if the fortunes of Japan's exporters are uniquely tied up with Asia, so are those of its banks. In Thailand, for instance, American banks have lent $5bn (pounds 3bn) to creditors whose repayments are suddenly 40 per cent more expensive than they were six months ago. For Japanese banks, however, the equivalent figure is $37bn.

The continuing wobbliness of the Japanese banking system, despite genuine efforts to write off and clear up the remaining bad loans of the bubble period, was emphasised last week with persistent but unconfirmed rumours that a major regional player, the Bank of Yokohama, was planning to sell its stocks in order to balance its books. Speculation - denied by the bank - drove the Nikkei share average down by more than 4 per cent.

Further concern about Japan's banks was expressed yesterday by IBCA, the international rating agency which said it was reviewing its ratings of Japanese banks downwards. IBCA warned: "The persistent failure of the Japanese economy to recover from its long period of stagnation is burdening banks with continuing asset quality problems, while the weakness of the stock market threatens them with large valuation losses on their excessively large holdings of Japanese equities."

The general sense of nervousness in the Tokyo Stock Exchange is compounded by anticipation of Japan's so-called Big Bang - the planned deregulation of the financial markets. The buffeting to which this will expose many firms is encouraging them to liquidate their assets to provide a safety net against imminent foreign competition.

The consequences of all this change are uncertain. In theory, deregulation, reform and the bracing winds of competition will in the long run whip Japan's companies and its economy back into shape. But the medium term is bleak. At best, the country faces a prolongation of the economic sluggishness which has already made it so miserable. At worst, a panic sell-off of stocks by Japanese companies could cause stock market collapses world- wide.

Modern Japanese are not used to biting the bullet and slogans like pain before gain are politically risky. The problem for Mr Hashimoto is that he cannot even release cash by cutting interest rates - because interest rates are virtually at zero anyway. In his last package, unveiled last month, the centrepiece was a feeble proposal to have more public holidays on Mondays, in order to encourage Japanese to spend more during their long weekends.

The most alarming thing about the present malaise is the almost complete lack of available remedies.

News
Ian Thorpe had Rio 2016 in his sights
people
Sport
Jonathan de Guzman of the Netherlands and Willian of Brazil compete for the ball
world cup 2014LIVE BLOG: Hosts Brazil take on the Netherlands in third-place play-off
News
Tommy Ramone performing at The Old Waldorf Nightclub in 1978 in San Francisco, California.
peopleDrummer Tommy was last surviving member of seminal band
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

PROMOTED VIDEO
Life and Style
Several male celebrities have confessed to being on a diet, including, from left to right, Hugh Grant, Benedict Cumberbatch and Ryan Reynolds
life...and the weight loss industry is rubbing its hands in glee
Voices
Spectators photograph the Tour de France riders as they make their way through the Yorkshire countryside
voicesHoward Jacobson: Line the streets for a cycling race? You might just as well watch a swarm of wasps
Life and Style
lifeHere's one answer to an inquisitive Reddit user's question
Arts and Entertainment
'Eminem's recovery from substance abuse has made him a more potent performer, with physical charisma and energy he never had before'
arts + entsReview: Wembley Stadium ***
Sport
Joe Root and James Anderson celebrate their record-beaking partnership
cricketEngland's last-wicket stand against India rewrites the history books
News
peopleDave Legeno, the actor who played werewolf Fenrir Greyback in the Harry Potter films, has died
News
ebookA unique anthology of reporting and analysis of a crucial period of history
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

Information Security Manager (ISO 27001, Accreditation, ITIL)

£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

Biztalk - outstanding opportunity

£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

Trade Desk Specialist (FIX, Linux, Windows, Network Security)

£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

Day In a Page

A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

A History of the First World War in 100 Moments

Peace without magnanimity - the summit in a railway siding that ended the fighting
Scottish independence: How the Commonwealth Games could swing the vote

Scottish independence: How the Commonwealth Games could swing the vote

In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

A writer spends a night on the streets

Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

UK's railways are entering a new golden age

New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

Conchita becomes a 'bride' on Paris catwalk

Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
Pétanque World Championship in Marseilles hit by

Pétanque 'world cup' hit by death threats

This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

Why did we stop eating whelks?

Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
10 best women's sunglasses

In the shade: 10 best women's sunglasses

From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

World Cup final: Messi? Mascherano is key for Argentina...

No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

Richard III review

Martin Freeman’s psychotic monarch is big on mockery but wanting in malice