Japan is again the place to do business
The implications of the US-EU crisis (it is one gigantic combined political governance foul-up, in my mind, not two separate events) have left Japan-based foreign executives uneasy. The scars of the last global downturn are still fresh. Recall that in 2009 Japan suffered a 10% drop in GDP from peak to trough. That was the most severe result amongst the rich countries. We discovered that Japan’s safely run banks did not compensate for the country’s high reliance on exports. As exports to the EU and the US vanished, so did Japan’s GDP growth.
Fortunately, I think it will be better this time.
First, 2008 saw Japan come off an export boom, driven by the super-weak yen and unsustainable levels of consumption in the EU and US. This time around, exports have less far to fall. In addition, Japan’s domestic economy will benefit from the reconstruction in Tohoku. Although this is not huge (4% of GDP over several years), it helps explain why Japanese consumption will not wind down sharply. In fact, consumption in Japan tends to be quite stable, even when the macro situation turns negative. Japan’s reliable consumption contrasts with the situation in the West, where consumption is high during good times, and then collapses.
Overall, it’s not a bad scenario, especially when you compare how ugly things look in the EU and US. Japan is like Cinderella and the two ugly sisters. It’s likely that the process of paying down personal debt will take several more years in the US – and it’s hardly started in the EU. The EU crisis is simply a continental banking industry realising that it has been sitting on its hands since 2008. The de-leveraging process, which should have started years ago in the EU, is now beginning with a vengeance.
As the US and EU governments struggle with entitlement spending, Japan has the right to feel smug. The Japanese government runs a tight ship. It has dramatically fewer civil servants than the US, France or the UK, for example. The state also pays far less towards education and unemployment benefits than in Europe. The only serious state expenditure by Japan is on the social security system as it pertains to the health and pension needs of the old. It’s this portion that is driving up government debt. But government debt should not be confused with the country’s wealth. In fact, Japan’s government debt actually reflects how rich Japan is, since it’s fully funded by Japan’s own wealth. Italy’s foreign debt, in contrast, is 40% held by foreigners.
Of course, that raises the question of whether Japan’s savings are being wisely spent (since they are being spent on maintenance of the old). Well, funding pensions and health is a form of government consumption. This consumption can still grow the economic pie since it causes a ripple effect in the private sector. You can thus view Japan’s government spending as a form of fiscal stimulus. Some deregulation in the medical/health sector might help further, although the UK (making cautious reforms) and the US don’t set a good precedent.
So there is no great reason for pessimism in Japan. The Economist Intelligence Unit view is that Japan will grow 2.2% in 2012, much more than the US or the EU. Interestingly, some smart foreign firms are refocusing on Japan – finally. They have discovered there is no correlation between GDP growth and corporate earnings. High growth in China requires huge investment and slim margins (as well as regulatory and IP risk). In contrast, Japan has been good to the corporate sector: business costs have fallen much faster than product prices. Pharmaceutical companies, for example, are turning to Japan to find the growth that is proving elusive elsewhere in the world. Perhaps 2012 will be the year when expats in Japan finally outshine their colleagues in India and China.