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Wednesday, June 18, 2003

Japan Will Become Normal......When Its Wealth Has Depleted Sufficiently

An off-beat view of the Japan crisis from Andy Xie. Even is it isn't exactly the vein I'm trying to tap, it's certainly a revealing insight into life in contemporary Japan from an ever-interesting economist:

Narita Airport was unusually empty when I visited last week. SARS has taken its toll in Japan. Japanese resident departures were down 42% in April from last year. It was probably worse last week. Empty taxicabs still lined sidewalks. The office vacancy rate hit an all-time high. Despite signs of depression, Japan appeared prosperous as usual and sentiment had improved compared to what I felt three months ago. I sensed a collective sigh of relief among Tokyo’s chattering class that the US and Europe are experiencing Japan-like symptoms. One cannot blame them for gloating over others’ misfortunes; Americans were constantly telling the Japanese what to do.Japan observers divide mainly into two camps. One always believes that reform will turn Japan around. They read into the tea leaves of every government action and base their optimism or pessimism on what they see in government actions. The other believes that Japan will collapse one day because it does not want to deal with its bad-debt problem. Genuine reforms could only follow a massive financial crisis. Japan would regain its dynamism afterwards.

Tokyo is turning from a centre for business to a place for fun. This is not necessarily bad. Vienna went through the same process in the 19th century. Austria became very big after a string of successes against a declining Ottoman Empire. It could not sustain its relative position when other strong states competed against it. Tokyo becoming Asia’s Vienna is not a bad idea. While Japan’s adjustment is inevitable, it could do better by destroying less value. There are still too many intermediaries between the fiscal deficit and the sushi table. Too many factories stay open for too long. Of course, the government wants to keep employment up and spreads its money around. However, there is a better way. How about asking everyone to take the summer off?

I believe Japan will become a normal economy again when its wealth has depleted sufficiently and the value of the yen declines sharply from where it is. That day will arrive when Japan begins to run a trade deficit. Automobile prices will determine when that happens. Japan’s automobile industry is the only one that still brings home the bacon. Structural labor problems in the US and Europe contribute to Japan’s profitability in this business. Japan’s auto industry would follow its electronics industry into low profitability when (1) low-cost Asian countries start to make competitive automobiles, or (2) structural reform of the labor markets in the US or Europe takes place. The day of reckoning for Japan is probably five years away. Before then, Japan’s current account surplus preserves its financial stability. A strong currency and weak economy would prevail. The value of the currency determines how quickly Japan runs down its wealth. The Japanese government will always intervene to keep its currency down to a level that strikes a balance between consumption and profit. This level appears to be between ¥115 and ¥125 to the US dollar. Any movement outside this range is likely to be temporary.
Source: Morgan Stanley Global Economic Forum

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