All not rosy for Japan Inc

PUBLISHED : Tuesday, 13 March, 2012, 12:00am
UPDATED : Tuesday, 13 March, 2012, 12:00am


Exactly one year and a day after Japan was hit by the triple whammy of a massive earthquake, tsunami and nuclear meltdown, there is a growing feeling, at least in the minds of market analysts, that the economy is on the mend.

Stock market players evidently believe it is true and have pushed the Nikkei index up by more than 17 per cent this year, touching the 10,000 mark again yesterday.

But, as always, it is best to beware the whims of Mr Market. A more careful analysis suggests that there are some short-term reasons for optimism, along with a lot of short-term, medium-term and long-term, as well as structural, reasons to worry about Japan's economy.

Optimists say that recovery has begun to kick in, key industries like car manufacturing bounced back faster than expected, and the Japanese currency is softening. The yen traded at 82.3 against the US dollar yesterday and is continuing to weaken, a great relief for Japan's major exporters grumbling that they cannot cope with the yen at 76-77 to the dollar, where it was trading recently.

Bill Witherell, chief global economist for Cumberland Advisors, notes that after negative growth last year, Japan's industrial production is rising. 'Over 2012 the advance in GDP could well fall in the 2-3 per cent range,' he says. 'Such an advance for what is still the third largest economy in the world, following some two-plus decades of stagnation, would be an important tailwind for the global economy, and would boost Japanese equities significantly.'

He also points out that the Bank of Japan, the country's central bank, has reversed its previous position and announced its intention to pursue quantitative easing along with setting a 'goal' of 1 per cent inflation after years of deflation. He predicts that the yen may reach 100 against the US dollar later in the year, and says that, 'Japanese equity valuations are very attractive'.

But there are some awkward pessimistic indicators too. For all the sombre ceremonies on Sunday commemorating the disasters and the loss of 20,000 lives, the surviving victims are unhappy at the slow pace of government reconstruction, which has also been marked by squabbling between different layers of government and agencies. More than 340,000 people were evacuated, and are still living in temporary housing, unlikely to be able to return home for years, if ever.

Cynics may say that however devastating the disasters and however tragic the plight of the survivors, the affected region contributes less than 3 per cent to Japan's GDP.

However, new revelations each week show how unprepared the government was for such a disaster and how fumbling the response was when it happened, and how collusion continues between leading government officials and the bosses of the nuclear industry they are supposed to police. None of this reassures the Japanese people that their future is in capable hands.

In an anniversary article Yuri Kageyama of Associated Press says that in spite of its promises the government failed to crack down on cosy relations between the supposed regulators and the nuclear industry. Only one of Japan's 54 nuclear plants has added vents that might have prevented the hydrogen explosions that escalated the disaster at Fukushima.

Japanese worried about nuclear safety can hardly be reassured by the response of an official of the government Nuclear and Industrial Safety Agency quoted in the AP article. The government, the official said, only learned of improvements nuclear plants had made after the event. 'Their actions are not required by law and so we don't have a way of checking,' the official claimed, ingenuously evading responsibility for safety issues the agency is meant to check.

What happened at Fukushima may have been a one in 100- or even 1,000-year accident, but the nuclear question is a vital one for Japan. Still unresolved questions of relationships between the regulators and regulated in nuclear and other industries are more important still for Japan Inc.

Until the disaster, nuclear power provided more than 30 per cent of Japan's energy needs and the ambition was to raise it to 50 per cent. After Fukushima, all but two of the country's nuclear plants were shut for safety checks. This led to the increased import of natural gas that was one factor behind Japan's trade deficit last year.

Closing of nuclear plants and the lack of decisive government action, such as carrying out rigorous stress tests on existing plants and devising a new plan, have contributed to a widespread sense of fear.

The shortfall in nuclear energy may become critical this summer in the Kansai region that includes Osaka and accounts for 20 per cent of Japan's economy, according to Kansai Electric Power Company, the region's major electricity supplier. It forecast that supplies might be 25 per cent below peak summer demand if nuclear plants were not restarted.

Of course, Kansai Electric's forecast is itself part of a complicated tussle over nuclear power. But it adds to a mix of economic uncertainty, compounded by continuing political aftershocks of the triple disasters.

Major Japanese manufacturers can live with a yen in the 90-100 range against the US dollar, but what they really crave is certainty. There is plenty of anecdotal evidence about hollowing out of the country's manufacturing. Large numbers of companies have already moved production offshore, while others face big losses thanks to the high yen.

If now power supplies are interrupted, more companies may turn their backs on Japan.

Japan's political paralysis may be the country's largest danger.

Morgan Stanley's Robert Feldman forecasts a general election in early spring, leading to a hung parliament and political instability, which might trigger a major political realignment. He sees reasons for optimism in this: 'Political movement, however messy, is more attractive than political stasis. Given the public mood, such movement would likely foster hope for small-government, pro-growth policies.'

His analysis reads as if he is suggesting an abracadabra moment, but it is hard to see any Japanese politician with such magical skills. In any case, it is a flimsy basis for optimism.


The amount GDP shrank on an annualised basis in the quarter ended December 31, compared with estimates of a 2.3 per cent contraction