Japan's recession following the September 11 terrorist attacks

Japan's Economic Crisis

Following the United States terrorist attacks on September 11 and the outbreak of mad cow disease, economic analysts are predicting the onset of a deepening recession in Japan. Some are even referring to the possibility of a depression in the world's second largest economy, due to the global economic downturn. Recently released surveys of future trends together with economic data recording economic performance over recent months point at least to the onset of Japan's fourth official recession - defined as two consecutive quarters of negative growth- in the space of a decade. Japan was last in recession in the first half of 1998 following the collapse of major financial institutions. The current downturn will be deeper, with private investment drying up amid slack global demand and bad loans weighing down the domestic economy, say analysts. The news means the world's three biggest economies - the United States, Japan and Germany - are all now in, or on the verge of, recession for the first time since the 1970s. One important indicator of the bleak outlook for the Japanese economy was the Bank of Japan's Tankan survey. The Tankan's quarterly diffusion index, which measures the percentage of major manufacturers reporting an expansion of business activity as opposed to the percentage that expect a decrease, fell to minus 33 for the September quarter compared to minus 16 for the previous three months. The index is now at its worst level since the April-June 1999 survey, when the figure fell to minus 37. Unemployment is at its highest level on record, and confidence is falling. Average household spending fell 0.8 percent in August, representing the fifth straight month of year-on-year declines. Consumer prices, which have been in decline continuously for the last 23 months, were down 0.9 percent in August from a year earlier. Official unemployment has risen to 5.5 percent with predictions that it will rise shortly, the highest levels in the post-war period. Tetsuro Sugiura, chief economist for Fuji Research Institute, has predicted that unemployment will rise dramatically to the 6 percent range in coming months. Sugiura said the September 11 terrorist attacks had hurt an already ailing economy and the anticipated disposition of bank bad loans could mean more than 200,000 additional jobless. The institute reported that the number of jobs lost through forced layoffs and bankruptcies jumped for the first time in three months, rising by 60,000 from the August figure. The Japanese Ministry of Health, Labor and Welfare announced that people claiming unemployment benefits reached a record 1.167 million in August. A report in the Japanese Times on suicide figures in 2000 revealed an increasing number of people committing suicide because of economic reasons such as debt and unemployment. Although the number of suicides in Japan in 2000 actually fell 3.3 percent to 31,957, the level has been over 30,000 for the third straight year. The report noted that the number of suicides by people who lost their jobs increased by 139 from the previous year to 1,335, while the number of self employed workers taking their own lives rose 86 to 4,366. Experts warn that the number of suicides in this category could increase further as the nation undergoes the tough economic reforms advocated by Prime Minister Junichiro Koizumi. The government admits these reforms will lead to more unemployment in the near term, the Times said. The job destruction is continuing as the process of corporate restructuring intensifies. The latest announcement of job cuts include: Sony Corporation, which will shed 5,000 jobs through early retirement; Komatsu, Japan's biggest construction machinery maker, will cut 2,200 jobs or 10 percent of its domestic workforce by 2004; Kobe Steel will slash its 17,600 workforce by 20 percent. Thousands of jobs are also set to go at the Mycal supermarket chain, which recently filed for bankruptcy with almost $15 billion in debts.

A less than obvious recession

On many of Tokyo's streets the slowdown is almost invisible. The shops are bustling and the restaurants full. While there are unemployed people in Japan - actually more than during the time of the bubble economy - it is hard to notice them in everyday life. Most people continue to be seen dressed well in public, though there are reports that many have switched from gourmet meals at expensive restaurants to instant noodles in the microwave. While women may be seen carrying Louis Vuitton bags around and dressed in fashionable clothes, they might use simple track suits to wear at home. There are other less noticeable signs of recession, though. Many empty taxies can be found lining up to pick up passengers outside restaurants or train stations, unprecedented number of sale signs in upscale department stores in Ginza, rising number of discount stores and ?100 shops and less crowded bars and restaurants at dinner time. At lunch time though, the restaurants continue to be fairly crowded for two reasons: the obasans continue to socialize and salarymen have shifted business entertainment from dinner to lunch time. While expense accounts have been considerably curtailed, companies continue to provide some degree of support to revive their businesses. Similarly, the Japanese government continues to spend enormous sums on public works project in the hope of reviving the economy. According to a recent article in Bloomberg News entitled "Think Japan's Economy is Bad Now? Just Wait," the situation will only get worse. " 'It's here where things get ugly,' " the article states. " 'As unemployment rises beyond today's record 5 percent, consumers may spend less. If already frugal households buy less, corporate profits fall further and so do asset values. Banks, then, may be forced to let more companies fail, boosting unemployment and reducing corporate profits. And so on and so on.' " This is the very cycle Japan's policy makers have been dreading for years. To date, Tokyo has held things together with ultra-low interest rates and aggressive fiscal spending. Now that borrowing costs are at zero percent and Tokyo has papered markets with more bonds than investors can use, that's no longer possible. Credit rating agencies are sniffing around Japan's finances, wondering if it's time for another downgrade. Faced with that darkening economic cloud and persistent problems at Japan's banks, the three main credit rating agencies recently dropped Japan's creditworthiness. Japan is now in a tie with Italy, as the least-likely major industrial nation to pay back its debts. The country's normally conservative Bank of Japan is predicting the contraction will last for two years. Trade Minister Takeo Hiranuma raised the possibility that the economy may continue to contract in the next fiscal year - which ends in March 2003. "If the current situation continues, negative growth is inevitable (in the next fiscal year)," he said. Economists are warning that the slowdown could become a meltdown. Says James Malcolm, senior economist at JP Morgan Securities (Asia): "We're in a very bad way at the moment and things are getting worse. Japan is no longer in recession - it's a depression." Merrill Lynch Japan chief economist Jesper Koll agrees, saying the economic outlook in Japan will get worse before it gets better. "We expect six consecutive negative quarters," he told CNN television. Koll said restructuring of the private sector and allowing companies to fall into bankruptcy was the sort of "creative destruction" that eventually would create room for profitable Japanese companies to emerge. But he warned that the process would be long and painful, with unemployment likely to go way above 6 percent. To recover from this recession, Japan needs to increase consumer spending. Japan's companies have responded to the problems for the first time by massive layoffs and unemployment is now higher than in the United States. And prices in Japan are actually falling, encouraging consumers to delay spending in the hope that goods will get cheaper in the future. The biggest drag on the economy is consumption, which accounts for about 60 percent of Gross Domestic Product (GDP). Despite some of the world's highest levels of savings and falling prices, consumer spending shrank by a worse-than-expected 1.7 percent. Less than four years after the last financial crisis, several banks are once again teetering on the edge of collapse, deflation has taken a grip and the government is burdened with the biggest public debt the world has ever seen.

Trade conflict with China

Falling growth and exports in Japan are fueling trade tensions, particularly with China. Japanese producers are demanding greater tariff protection for the weakest and most regulated sectors of the economy, such as agriculture and textiles. In late April, prior to Koizumi's inauguration, the LDP government raised tariffs on the import of leeks, shiitake mushrooms, spring onions and straw for tatami mats. The Chinese government retaliated by imposing 100 percent tariffs on the import of automobiles, mobile phones and air conditioners from Japan. China, which is seeking membership to the World Trade Organization (WTO), has stated that Japan's actions contravene WTO rules because the tariffs selectively penalize products mainly imported from China. Talks between trade officials of the two countries are planned but there appears to be little sign of a resolution. Japanese Trade Minister Takeo Hiranuma warned that Tokyo would not back down insisting that the Japanese tariffs were within WTO rules. China is about to join the WTO and Japan supported that. If it is joining the WTO it should follow WTO rules, he said. Trade between China and Japan has risen rapidly to reach $85.73 billion last year and, according to the Japan External Trade Organization, is expected to go over $100 billion this year. Japan last year had a huge deficit of nearly $25 billion with China. In part the rise of Chinese exports to Japan is fueled by growing Japanese investment in China. As Business Week commented: " 'The irony of the trade flap is that most cheap Chinese goods flooding Japan are made by Japanese companies.' " While the government is maintaining the tariffs against China to appease rural voters in the lead up to upper house elections, sections of big business are warning of the dangers of such measures. Any move to block free trade will end up hurting Japan, commented Honda CEO Hiroyuki Yoshino. An article in the Yomiuri Shimbun, entitled "Is Our Economic Power Fading," argued that economic restructuring was what was required to maintain Japan's economic position. The current gradual decline of Japan's trade surplus portends the fall of the nation, which does not want true reforms, from the status of an economic superpower to that of a fifth rate economic has-been. Citing a survey late last year of 25 major cities in Asia, it blamed labor and infrastructure costs in Japan. Overall labor cost of local employees in Singapore was one-sixth of the cost of Japan, salary of engineers was one-third, land prices in industrial complexes were half, electricity costs were also half and basic telephone charges were one-third. In China, labor costs and land prices were even lower - one-sixth to one-tenth of those in Singapore. Speaking on behalf of big business, the article gave tentative support for the governments restructuring plans, calling on its readers to keep a strict eye on the Koizumi administration. As the figures indicate, any attempt to implement the so-called reforms and make Japan competitive will have a devastating impact on the living standards of the Japanese working class. For most of the postwar period, the Japanese ruling class was able to ameliorate social and class tensions with virtual full employment and steadily rising living standards for the majority of the population. Now, after a decade of economic stagnation, falling real wages and growing political frustration, worse is in store for workers. Despite interest rates being virtually zero and repeated attempts by government to stimulate economic activity, the August economic report by Prime Minister Junichiro Koizumi's office was compelled to admit: " 'Exports and industrial production have fallen substantially, and business investment is falling as well. Housing construction is declining. Job offers and overtime hours are edging down. Private consumption has remained broadly flat.' " Within that climate Koizumi is under pressure to work with the major banks to reduce the indebtedness of the financial system. This will involve bankrupting thousands of companies that have outstanding loans they cannot pay back. Estimates are that 1.1 million jobs will be lost just from purging the economy of the worst $109 billion worth of debtors. While the banks admit to $270 billion in bad debt, institutions such as Goldman Sachs believe the true figure could be as high as $1.9 trillion. Ken Courtis, the vice-chairman of Goldman Sachs (Asia), warned on August 2: "Japan is in a debt trap. Remember three years ago when Thailand went under? It set off a crisis that eventually shook Wall Street. Japan's economy is 42 times larger than that of Thailand, so when Japan gets to a point when it can't keep putting off the day of resolution of this crisis, then I think we should all attach our seatbelts." Japan's one hope is to revive its export sector, and the government has been quietly trying to devalue the yen to help companies sell more abroad, seeing it hit a record low against the dollar soon after Christmas.