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Here Comes The Sun — page 3
Some say the psychological shift in Japanese attitudes toward China goes beyond mere business opportunism. "For more than 2,000 years, China was the parent state and Japan was the satellite," says Yoshihiro Sakai, managing director of investment banking at Nomura Securities. In the past century, he continues, Japan thought it could reverse that relationship—militarily before World War II, and economically after it. Japan today is the world's second largest economy. But as China gradually gains an edge economically, demographically, in diplomatic clout and in military might, Japanese are beginning to accept the idea that the past century may have been an exception, not the rule. Says Sakai: "More people now believe that the best course for the future of Japan is to figure out how to maximize its relationships with the two real global powers: China and the U.S."
Even with the profound economic impact of China, there is little chance that Japan's fortunes would have changed so quickly were it not for a surprising new spirit of dynamism among policymakers in Tokyo. After becoming Bank of Japan governor just over a year ago, Toshihiko Fukui took unprecedented measures to fight the country's chronic struggle with deflation. He embarked on a radical monetary easing policy (by buying assets such as corporate bonds and company stock) in order to flood the system with cash. And so far, the policy seems to be having an effect because, by many measures, the rate of deflation is slowing.
The Ministry of Finance, meanwhile, has been conducting an experiment of its own: since the start of this year, the Japanese government has spent a boggling $90 billion buying dollars on international currency markets to keep the yen weak. (A weak yen aids Japan's export industries by lowering the price of Japanese goods abroad.) That is almost half the amount spent in all of 2003, itself a record year. Critics have long called this policy anticompetitive and unsustainable. But with a lasting recovery looking increasingly likely, the ministry may have achieved its goal, enabling it to scale back its interventions in recent weeks.
While Japan Inc. may be pulling in the right direction for the first time in years, this recovery might still prove vulnerable. With a national debt that's 160% of GDP (compared with 24% on average for developed nations) and a budget deficit of 8% of GDP, Japan's national balance sheet is the worst in the developed world. Moreover, the country's recent economic growth stems overwhelmingly from just two sources: corporate spending and exports. What's still missing from the mix is a convincing improvement in domestic consumer spending. "Unless the household sector recovers, real growth will sputter out all over again," says Shuji Shirota, a Tokyo-based economist at investment bank Dresdner Kleinwort Wasserstein.
Tightfisted Japanese, who continue to worry about deflation, shrinking pensions and eroding home values, have stuffed almost $400 billion in bank vaults or beneath futon mattresses. Unlock even a percentage of that money, and Japan's elusive domestic rebound will commence. And there are heartening signs that a consumer-led recovery is already under way. Household spending has increased every month for the past four months. Average monthly income, meanwhile, jumped 4.1% and retail sales rose 0.9% in February. Merrill Lynch's Koll says recent employment statistics suggest this upturn in wages and spending will continue or even accelerate. Meanwhile, the unemployment rate has fallen to 5.0% from last year's postwar peak of 5.5%, and companies in Japan are currently looking to fill a hefty 679,000 new positions, almost 30,000 more vacancies than the previous high in 1991. "Everybody is talking about jobless recoveries in the U.S. and Europe," Koll says, "but Japan is enjoying a job-rich recovery. There are more companies looking for more workers right now than at any time in Japan's history." He also notes that 41% of new jobs are in the service industries (up from 20% in 1990), while manufacturing and construction jobs now represent just 16% of posts available, compared with 35% in 1990. Taken together, the changes suggest that Japan's long-overdue transformation from a fully developed industrial economy to a postindustrial service economy is finally taking place. "The probability for a successful transition from an export-led expansion to a consumer-led one is higher now than it has ever been," Koll says.
And what of structural reform, that overhaul of Japan's business culture so often cited by politicians and economists as essential for the nation's return to economic health? There is growing unease that the China boom and the government's success at fighting deflation have enabled Koizumi to abandon some of his reform initiatives. Despite the great strides in efficiency and productivity made by its export manufacturers, Japan's more backward sectors—notably agriculture, distribution, construction and retailing—stumble along as lamely as ever, overburdened with excess capacity, excess debt and excess labor. "Small and medium-size companies still need to go through the restructuring that have been so painful for big businesses lately," says Komatsu's Sakane, who recently finished a two-year round of streamlining that cut his firm's overhead expenses by 4 percentage points to 20% of sales, bringing it more in line with U.S. nemesis Caterpillar. Until such reforms catch on more widely, many doubters insist that Japan's recovery may still prove fleeting. But after so many years of being dismissed as an economic lost cause, the nation has at last earned the right to walk with a little swagger in its step.
—With reporting by Toko Sekiguchi/Tokyo
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