|Japanese Prime Minister Taro Aso at a meeting of the Council on Economic and Fiscal Policy at the Prime Minister's Office on Tuesday, Feb. 03, 2009. |
Japan is in the throes of a deep recession with a public debt at 180 percent of GDP (gross domestic product). And its plight could be intensified by a “race to the bottom”, with sterling falling 60 percent against the yen in the space of six months, says Professor Norbert Walter, Chief Economist of Deutsche Bank Group - - Germany's biggest bank. He says the international community should ask itself whether it really wants to put Japan in such a position.?
"The issue should concern us Germans in particular, given how similar we are to Japan in respect of the constraints of international dependence and population ageing," Walter says.
Japan is the world's second biggest economy, after the US.
In a commentary, Prof. Walter says the nation of cultural profundity and impeccably good taste has been in crisis for more than 15 years and now it is teetering on the brink of a depression. That the global economic crisis would throw Japan off course was to be expected. But to be hammered by a brutal appreciation of its own currency in a situation like this marks the kiss of death for its export industry.
Walter says, since early summer the yen has soared 20 percent against the dollar, more than 40 percent against the euro and almost 60 percent against the pound. That is too much for even the most stalwart to bear. When we stop to consider that it takes about a year for the shift in exchange rates to unfold its full effect on exports, what already happened to Japanese shipments in October and November 2008, when they plunged by fully 25 percent on the previous year, must shake us to the very core. And although prices for raw materials have fallen dramatically, Japan – the country whose trade balance was in surplus for decades – now has a trade deficit for the second month in a row. At the end of 2008 Japan’s gross national product was in its third straight quarter of contraction. In the fourth quarter output plummeted by around 10 percent on an annualised basis. The spectre of deflation, i.e. falling prices, is looming again. Monetary and fiscal policy makers are therefore right to open the economic floodgates. But what was the central bank supposed to do, with the interest rate already down to 0.3 percent? Will the cut to 0.1 percent really make any difference? Further rate cuts are now no longer an option.
Prof. Walter asks: and just what sort of fiscal stimulus is to be expected from Japan, whose public debt as a percentage of its national product is two and a half times as high (180 percent) as that of Germany (70 percent), itself a country with excessive debt levels? Particularly since measures of this kind have proved so ineffective in the past 15 years! Where bridges have already been built to all the Japanese islands, even those that are hardly inhabited. Where sewage plants are not just modern but also feature aesthetically formidable architecture – everywhere. A country whose schools are well equipped and whose towns and villages are clean and well presented.
What will happen in 2009 to this great, proud and culturally rich country? How will it handle the deepest recession since World War II? Will the international community realise that even a wealthy, mature country cannot be expected to cope with such a brutal surge in its currency? And how will China and the US cooperate to spare Japan humiliation? Will the Chinese, Americans and British move to correct the strong depreciation of their currencies that is bolstering their own exports, and possibly even allow revaluation softening? This kind of coordination on exchange rate policy is urgently needed. It is the only way the yen can escape its current high level. But will it happen?
"I would be very surprised to see the global community take such timely and constructive cooperative action. Instead, I expect more of an “every country for itself” attitude to the detriment of countries like Japan. However, despite the crisis and mounting domestic political pressure, protectionist approaches instead must be avoided on all sides in this world economic crisis," Prof. Walter says.
And finally, Walter asks, what will the Japanese come up with themselves to beat the deflation trap and the danger of depression? Their options are limited. Monetary scope is exhausted and further fiscally effective spending packages hardly conceivable. As already mentioned, Japan’s infrastructure and private provision with consumer goods have reached high saturation levels. Surprisingly, the most effective policy that government could adopt to help the domestic economy would be to boost development aid for countries that give preference to Japanese capital goods for their infrastructure and modernisation. This would be a way of spurring Japan’s output and expanding sales markets for Japanese exporters. I can only hope that this cyclical stabilisation of demand works for Japan and that it is spared the descent into depression.
But to secure growth in the medium term, more must happen in the land of the rising sun, Prof. Walter says. Japan needs later retirement and more women in work, and the country and its labour markets must open up more to Japan’s Asian neighbours.
"I truly hope that this great cultural nation will preserve its heritage for the rest of us – indeed, that it will pass this heritage on to the world. And that it will return to prosperity, even if it cannot replicate the rates of growth seen between 1960 and 1990. Ideally of course, Japan’s renaissance should take place more as an integral part of the (Asian) world than as a proud but stand-alone model on a rugged island. We Germans should wish for such an outcome in the interests of both Japan and ourselves, because Germany and Japan are similar in many respects: their reliance on exports and the demographic outlook, for example. The only difference is that developments in Germany lag behind those in Japan by five to ten years," he concludes.