Japan has been on the sidelines of the crisis now gripping western institutions, with most of its banks too conservative – or too slow – to jump on the derivatives bandwagon that has now careered off the rails.
But the crisis is quickly catching up with Japan’s economy, via softening export markets and, although pressures are now easing, higher commodity prices.
This year, according to Capital Economics, which has taken a generally bullish line, Japan will struggle to notch up growth of 0.8 per cent. That would break a winning streak of six years in which the economy grew at a respectable average of 2 per cent a year.
The external shock has been twofold. First, with regard to exports. US demand had been falling for many months but, until recently, Japanese exporters had offset that through shipments to China, south-east Asia and commodity-rich economies. But by August, US demand was falling at 22 per cent and, amid signs of tapering activity elsewhere, Japan recorded its first seasonally adjusted budget deficit in a quarter of a century.
With exports gone, there is not much left. The economy has for years been over-dependent on export-led growth, plus the capital investment this encouraged. Consumer spending, which makes up 60 per cent of output, has been flat.
That resulted largely from Japan’s so called wageless recovery. More part-time labour, the retirement of highly paid baby boomers and continuing difficulties at small companies meant that remuneration barely budged.
With no extra money in their pockets – and with the government trying to claw back more in taxes and pension premiums – people have been reluctant to spend.
That tendency has been exacerbated by the other shock: inflation. After a decade in which prices fell almost continuously, albeit mildly, headline inflation ticked up quite sharply this year. It is now running above 2 per cent, damaging consumer sentiment further.
Stripped of energy and food costs, however, underlying prices are still barely moving. The Bank of Japan thus cannot raise rates and might come under pressure to cut them from their lowly 0.5 per cent as part of global co-ordinated action. Fortunately, that headache might resolve itself. If commodity prices continue to fall, headline inflation should drift back downwards.
In the latest BoJ Tankan, which tracks consumer sentiment, large manufacturers are less confident than they have been in five years, with sentiment falling from +5 to –3 – into negative territory for the first time since 2003.
But that is a far cry from the double-digit collapses that accompanied the deep recessions of 1997 and 2001.
For the moment, at least, Japan remains on the periphery of the earthquake.