Martin Spring
London calling
If stock markets give an early signal of economic recovery, as is widely believed, then the performance of the Tokyo bourse in recent months suggests that the world’s second-
biggest economy will soon start to pick up speed.
There are two reasons why Japanese shares are outperforming.
One is that the Japanese bourse is largely insulated from Wall Street’s problems, being less affected by what happens there than other major markets because it’s primarily driven by domestic factors liquidity and confidence in an economy that generates a third of the world’s savings every year.
The other reason is that the surprising choice by the ruling party of one of its leading reformers, Junichiro Koizumi, as the new prime minister, has raised hopes that the government will, at last, start seriously addressing structural problems that have stymied economic growth for more than a decade.
Koizumi is an unconventional politician by Japanese standards.
He eschews dark suits, is passionately fond of heavy metal rock music, is outspoken on controversial issues and is something of a playboy, admitting his patronage of Ginza bars.
Much more importantly, he favours the radical reform of Japan’s financial system, which is blamed by many for the country’s poor economic performance in recent years.
He wants to:
l Force the banks to address their problem of dud loans which could be anything from $400-billion to $1,2-trillion, according to whose figures you choose to believe by putting their weakest debtors into bankruptcy and writing off loans that can’t be recovered. The aim would be to clear the decks and so make it possible for banks to resume new lending, but to businesses with a future, thus stimulating economic growth.
l Put a brake on deficit spending financed by borrowing, which has driven up central- and local-government debt to the highest-ever level for a major nation not at war, and in particular to cut wasteful spending, such as the huge sums poured into construction projects favouring the ruling party’s financial supporters.
l Privatise the postal savings system, the ”world’s biggest bank” with $2-trillion of deposits, which keeps the private-sector banks starved of capital.
l Improve unemployment benefits and strengthen the underfunded pension system.
Trouble is, Koizumi was largely chosen by his party in the hope that he can rescue it from defeat in upper-house elections in two months’ time, because of his personal popularity
with the voters.
There are considerable doubts whether he can mobilise enough support in Parliament to push through reforms he favours, specially as their price would be heavy in terms of bankruptcies, job losses and intensifying competition for traditionally protected sectors, such as the thousands of mom-and-pop stores.
Although my favourite Japan fund, Ed Merner’s Atlantis Japan Growth, is up 17% this year, I remain unconvinced that the Japanese stock market’s current buoyancy is anything more than a strong bounce.
Japan’s fundamental problem is weak domestic demand because consumers, worried about the future, keep a tight cap on their spending and save heavily, while businesses generally aren’t doing well enough to encourage them to invest in expansion.
Old Mutual’s United Kingdom-based strategist, Nigel Morgan, rightly warns: ”Reform
will inevitably take many years, with many setbacks as already experienced in Japan’s Asian neighbours so investors might sensibly remain cautious, the more so as Japan is slipping back into recession.”