Japan Outlook for 2012

Mr. Yen & other economists ponder Japan's economy

I attended a professional luncheon and press conference at the Foreign Correspondents Club of Japan today. The theme of the conference was the prospects for Japan’s economy and financial markets in 2012, discussed by Eisuke Sakakibara, former International Vice Minister at the Ministry of Finance, and nicknamed ‘Mr. Yen’, Jesper Koll, Managing Director and head of equity research at JP Morgan Securities Japan, and Hiromichi Shirakawa, chief economist for Japan at Credit Suisse Securities.

‘Mr. Yen’ is of course famous for his yen forecasts when at the MOF, so I will start right out with his latest prognostication: in the next 6 months, Professor Sakakibara expects the yen/$ to be trading between 72-79 and the yen/euro at 95, and possibly as strong as 90 yen to the euro. Despite the impact on Japan exports, Sakakibara puts a positive spin on such yen appreciation: a strong currency meaning the value of Japanese assets goes up and the price of M&A by Japan overseas becomes more attractive. He does not believe that market intervention to prevent the yen’s further appreciation would be successful without the cooperation of both the US and EU, unwilling participants in such coordinated policy.

In contrast to Hiromichi Shirakawa, Professor Sakakibara is not as concerned with the ‘hollowing out’ of the Japanese economy—as Japanese companies move operations out of Japan—what Mr. Shirakawa refers to as ‘outsourcing’. Mr. Shirakawa forecasts 2012 economic growth of 1.4% (assuming the yen remains stable), reflecting the positive impact of March 11 reconstruction activities. He is concerned with the aging of Japanese infrastructure (plant), influencing future supply constraints, and the declining Japan external surplus (balance of payments, current account), aggravated by rising energy prices. This trend could put pressure on the Japanese bond market, with interest rates rising 2-3% in 3-4 years time.

Professor Sakakibara is more optimistic. He believes that Japan’s GDP growth could amount to as much as 3%  in the next 6 months, buoyed by post-March 11 reconstruction. Despite positive signs of economic recovery in the US, he feels that US recovery may not be solidly grounded, as the US has not cleaned up its balance sheet after the 2008 financial crisis. He believes that the US could suffer from a ‘balance sheet recession’ similar to the one Japan experienced in the 90’s, and that such a recession together with unresolved problems in the Eurozone could trigger a worldwide recession, or even depression.

This was not Professor Sakakibara’s forecast, just an issue of concern. He was also concerned about the impact on world economy should China’s bubble burst, which he likened to the US bubble economy, then an emerging economy, burst in the 20’s. Professor Sakakibara did not suggest that China’s bubble would burst, rather only remarking on the impact on world economy if it did.

Jasper Koll was also bullish on the Japan economy in 2012, predicting GDP growth of 2.4%. He attributes this to not only reconstruction activity but also a ‘wake up call’ in the private sector. Today, Mr. Koll suggested, in the private sector action gets a premium, and complacency (excuses for doing nothing) is no longer in vogue. He believes that the ‘metabolism of policy-making and debate’ translating into action is accelerating.

Mr. Koll also forecast that 2012 is the year deflation ends in Japan and believes that in the spring labor offensive (‘shunto’) wages will rise 1%. He said that bank lending turned ‘positive’ in September of last year and that ‘Mr. and Ms. Watanabe’, his metaphor for consumer spending, will open up their purses this year.

While the private sector is aggressive, Mr. Koll lamented that the public sector is lagging. Nine months after March 11, domestic policies are still poorly defined.  Particularly ‘shameful’ is the lack of energy policy post-March 11. He emphasized the upside potential in Japanese economy—were domestic government policies in place—citing the example of tremendous upside in health care services, and economic activity related to needs of the aging population. He suggested that overregulation is strangling this upside potential. With appropriate government domestic policy, he believes that Japan has the potential to return to economic growth of 3%/year.

The Q and A segment of these press conferences is usually as stimulating as the prepared comments:

When asked about the prospects for Japan auto industry in 2012, the panelists were bullish, particularly Mr. Koll, who pointed out that makers like Toyota and Nissan will ride the tailwind of recovery of auto industry in the US; he felt that the wave of Korean investment in US dealerships had ended, and cited the remarkable cost efficiency steps of Toyota to cut their production line of car engines from 20 to 10. One panelist quipped that investors might go ‘long on Toyota’ and ‘short’ Hyundai.

All of the panelists were naturally concerned with the Eurozone crisis, described as not currently showing an exit strategy. Understandably, no one put a positive spin on the S&P downgrading of France and 7 other EU country sovereign credit ratings, even if anticipated. Professor Sakakibara felt that in 4-5 years (if not sooner), the Euro could disintegrate and the EU central bank itself.

Professor Sakakibara pointed out that despite their political differences, the Chinese and Japanese economies are tightly integrated, and he remarked that integration in Asia is nearly as great as in the EU, even if there is not the institutional framework in place.

He was sharply critical of the Japanese education system in failing to teach Japanese to speak English. He said that everywhere he traveled in Asia, English was the common language that he spoke and without improvement, Japan would be held back.

Mr. Koll mentioned two remarkable facts. One: at this year’s Boston Career Forum his equity research group interviewed 170 job candidates. Forty percent of these job seekers were Chinese who had lived in Japan a minimum of 3 years and were seeking jobs in Japan with JP Morgan. Two: today at Harvard, there are more students studying Japanese than Chinese. Surprised? It is because many of these students of Japanese are Chinese!

The panelists offered strong encouragement to Japanese university students seeking jobs in today’s environment. One remarked that job hunters were too focused on landing jobs in major listed Japanese companies, and predicted that in 50 years 80% of these companies may be gone. He mentioned that UNIQLO, although founded in 1949, exploded in popularity just 20 years ago, and that such truly global companies should be included among job targets.

All the best,

Warren J. Devalier

©2012 Warren J. Devalier