Global Economic Crisis

Japan, now the third largest economy in the world (China has recently assumed the spot of number two) is continuing to accrue worrying economic metrics.  For the first time in nearly two years, export-dependent Japan incurred a trade deficit. According to Tokyo, the nation incurred a $5.7 billion negative trade balance in January. The trade figures, however, were not the only troubling development on  Japan’s economic front.

Moody’s has just lowered Japan’s debt rating from stable to negative. This comes in the wake of Standard & Poor’s downgrading Japanese public debt from AA to AA-.  Japan has the developed world’s highest  ratio of public debt to GDP, a figure approaching 200 percent. These recent developments portend the growing risk of a sovereign debt crisis confronting Tokyo.  A growing number of investment fund managers are warning that the current trajectory of Japan’s public debt and annual government deficits is unsustainable. Could Japan become the Greece and Ireland of the Far East? These negative metrics, in conjunction with Japan’s aging  and declining population, point to a deepening economic and fiscal crisis for the land of the rising sun.

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The Japanese economy never did recover from the implosion of its banking sector in the 1990s. Tokyo decided to artificially maintain its banks on life support, precipitating the country’s notorious L shaped recession. Now that the  global economic crisis has done its share of damage to Japan’s export machine, Japan looks to endure a second miserable decade of economic recession and stagnation.

The latest economic indicators out of Tokyo show manufacturing output having declined  nearly 2 percent in September, the 4th straight month of industrial decline. More worrisome, the figures also show the Japanese economy experiencing its 19th consecutive month of  declines in core consumer prices. As all economists are aware, deflation is a dragging on the consumer sector of the economy, inhibiting individual consumers from executing major purchases. This explains the weak domestic demand in Japan, and with a rising yen threatening exports, it is no surprise that the prognosis for the Japanese economy is very grim.

As the United States has largely replicated Japan’s strategy in the 1990s of propping up insolvent banks at all costs,  it may be that what the Japanese economy is enduring is also a harbinger of the long-term economic path for the United States.

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Yukio Hatoyama, whose Democratic Party won a landslide election over the long-serving Liberal Democratic Party, has been officially elected by the Japanese Diet as the nation’s new Prime Minister. His number one priority is the ailing Japanese economy. Accordingly, his selection for the pivotal post of Finance Minister was clearly an appointment of the greatest importance.

The new Finance Minister of Japan is Hirohisa Fuji, a 77 year-old veteran politician and Finance Ministry bureaucrat, who had previously served as Finance Minster in the 1990s. He is reputed to be a fiscal conservative, who seeks to reduce government spending and bring Tokyo’s massive public debt under control. His challenge will be confronting the election promises emanating from his own political party, which has promised to increase social spending. Though this promise is based on the belief that economies can be found by eliminating wasted spending and massive stimulus allocations on behalf of corporate Japan, there are risks involved in pursuing this policy course.

With Japan’s export machine badly hurt due to the global contraction in trade, the agenda of the new power elite in Tokyo risks a double-dip recession.  Furthermore, the challenge of tackling a debt to GDP ratio of nearly 200% seems overwhelming. With one of the most rapidly aging populations on earth and a very low birth rate, it seems nothing short of draconian spending cuts will succeed in reducing Japan’s debt burden to manageable levels. But in order to pursue that course, Prime Minister Yukio Hatoyama will have to jettison most of his campaign spending promises.

Perhaps Japan’s new Prime Minster may seek economic advice from his wife, who has publicly claimed she was transported to the planet of Venus during one of her dreams. I raise this suggestion, as it appears that a solution to Japan’s deep and apparently insoluble economic crisis requires both a dreamlike state and an out-of -this-world solution if there is to be any prospect of a resolution without the dire risk of national insolvency.

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According to the most recent data, Japan’s industrial production dropped by more than 8 % in November from the previous month. This is the steepest one-month decline in Japanese industrial output on record, and is directly related to the demand destruction resulting from the global economic crisis. Japan’s economy is largely based on export-driven manufacturing, so the latest economic data indicates that worldwide demand for Japanese manufactured products is dropping like a lead stone.

Japanese automakers are among the major producers that have seen a sharp decline in orders for their products from overseas customers, especially in the United Sates. Many analysts and economists are issuing dire forecasts that the Japanese economy, highly dependent on export-driven trade, will contract sharply as the Global Economic Crisis grows more severe

“Production is falling off a cliff,” said Naoki Iizuka, a senior economist in a statement to the Reuters news agency. “The Japanese economy is unlikely to bottom out until October-December next year as output is expected to remain very weak until then,” he added, reflecting the gloomy cloud now hanging over the world’s second largest economy.

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