Japan is a cautionary tale for anyone with an eye for green shoots. At least twice in its “lost decade”, fleeting signs of recovery yielded to the reality that the economy had not yet overcome a crisis emanating from its burst bubble at the start of the 1990s. Twenty years later and even the seemingly verdant foliage resulting from six years of growth between 2002 and 2008 has shrivelled to nothing. The shockwaves from a crisis this time manufactured in the US will scythe some 6 per cent off output.
Japan’s growth spurt was wrongly judged by many to have resulted from government policy, a line peddled by Junichiro Koizumi, former prime minister, in his “no growth without reform” mantra. What he should have said was “no growth without external demand”. Almost all the expansion under his premiership was predicated on strong demand from the US, China and elsewhere. That demand has now gone into freefall. And with it any hope of expansion. Figures out last week showed that, in the year to March, the economy suffered its first trade deficit in nearly 30 years. Exports, production and capital expenditure have collapsed.
There are signs that the fall in exports is slowing. Thanks to corporate Japan’s agility, inventories have been cut even faster than demand, preparing the ground for a modest rebound in production. There are those green shoots again. But other aspects of the economy will get worse before they get better. Last week, Mizuho became the latest Japanese bank to reveal that hoped-for profits had turned into massive losses, in its case close to $6bn in the year. Even though Japanese banks were relatively shielded from the toxic assets that have felled many of their western counterparts, the collapse of the real economy has caught up with them. Loans have turned sour and equity holdings have fallen in value, damaging capital adequacy.
In New York last week, Masaaki Shirakawa, governor of the Bank of Japan, warned of the dangers of a vicious spiral resulting from the negative feedback between the financial system and the real economy. Japan pulled out of that horrible freefall largely thanks to prodigious foreign demand, which helped clean up the banking system via vastly improved corporate performance. The problem for the US and Europe is that no such outside stimulus exists. As Robert Madsen says in this month’s Foreign Affairs: “There is little chance of a boom in exports to other planets.” They will have to do it all themselves. That is the real lesson of Japan’s banking crisis.
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