Raw Japan

Historic win in Japan. Now what?

Historic is usually a word that makes my skin crawl when I see it in the news. Journalists are prone to overuse it, so when I saw it in our election stories I had to stop myself deleting it — because this election truly is historic.

The Liberal Democratic Party had never lost an election since its founding in 1955. Even when it lost power for a few months in 1993/94, it was because of LDP lawmakers defecting rather than an election loss.

So the Democratic Party, under prime minister-elect Yukio Hatoyama, has a huge mandate. What will he do with it?

It’s clear that the last two elections were votes for a change to the old system where the ruling LDP, big business and bureaucrats ruled the place. Remember the 2005 LDP landslide was led by Junichiro Koizumi running on the destruction of his own party’s pork-barrel history.

The question is whether voters also rejected deregulation in the wake of the financial crisis and slumping exports that put large numbers of unprotected contract workers out of work.

The Yomiuri newspaper, Japan’s biggest seller, certainly subscribed to that view in its editorial on Monday. Along with the undisputed argument that voters were disgusted with the LDP’s failures, it said the defeat “was brought about by the collapse of its structural reforms that went too far”.

from Photographers Blog:

Homeless, sick and “thanking God for this wonderful place to live”

Reuters Boston Photographer Brian Snyder spent a very long and claustrophobic day in the tiny dark hotel suite where a homeless nurse, Tarya Seagraves-Quee, and three of her four children have been living in Massachusetts for nearly two months.

A record number of families are now being put up in motels due to high unemployment and the rising number of homes going into foreclosure, costing taxpayers $2 million per month but providing a lifeline for desperate families.

Seagraves-Quee has found refuge in a motel after losing her job in Georgia more than a year ago and going without health-care for about 10 months. She suffers from multiple sclerosis, Aspergers syndrome, anemia and lupus, and now is scared she may have cancer. Two of her children, aged 16 and 6, are autistic. After losing her job, and facing repeated physical abuse from a boyfriend, she spent $700 - almost all her savings -- on airline tickets for her family to stay with relatives in Boston.

from Summit Notebook:

Nomura: Lehman taking shape

Nomura's takeover of Lehman Brothers' European and Asia businesses is yielding results, and concerns the Japanese bank will struggle to marry cultures is misplaced, according to the man who drove the deal.

"It's a very successful start and we've been happy with what we've got," Takumi Shibata, chief operating officer for Nomura, told the Reuters Japan Investment Summit in Tokyo.

"We are finding surprisingly little differences between Lehman in Asia and Europe and Nomura in Asia and Europe. It was a marriage of two multicultural organisations, and both Lehman Brothers and Nomura aspire to be houses with a collegiate culture."

Nomura had kept most of the Lehman staff it wanted to, has learnt from past international expansion mistakes, and was winning back business lost in the aftermath of the deal, he said.

It was number three in London equities trading in June, for example -- from "nowhere" in December and number 8 in May.  Lehman had been number one before its collapse, however. "There's no guarantee that we will go back to number one, but we want to be," he said.

Nomura is also hiring bankers to beef up its U.S. presence, and is applying for an equity license in Australia and looking for a partner in China.

from FaithWorld:

Japan’s rare Catholic PM Taro Aso meets Pope Benedict

Japanese Prime Minister Taro Aso, a member of Japan's tiny Roman Catholic minority, had a chance toenjoy some time away from political trouble at home when he met with Pope Benedict on Tuesday.

As his first stop during a trip to attend July 8-10 summit of G8 leaders in Italy, Aso went to the Vatican, gave the pope a Sony digital video camera and discussed the global economic crisis with him.

His visit was timely in that respect -- Benedict published an encyclical on economic and social issues today, calling for a bold reform of the world economic order to overcome the financial crisis and redirect the focus of business to the welfare of all people.

Aso, the first Japanese prime minister to meet a pope in 10 years, told Benedict that Japan wanted to cooperate with the Vatican, according to his aides. According to the Vatican daily L'Osservatore Romano, the two men had a cordial discussion that "touched on current international issues such as the economic crisis and the commitment of Japan and the Holy See to Africa. On the bilateral level, the good relations between Japan and the Holy See were noted."

For the unpopular prime minister, who looks set to lose a general election due by October, meeting Pope Benedict was probably a personal highlight of his trip, even though voters would not care much.

Aso is having a tough time at home with his support falling on doubts about his leadership abilities and the main opposition party has a good shot at ending more than a half-century of almost unbroken rule by Aso's business-friendly Liberal Democratic Party.

Pope Benedict told Aso that he was happy to meet a Japanese prime minister who is Catholic and to know that Japan's society is open to various religions.

From JGB booms to tombs

The global financial crisis has been a catalyst for many to look back at history and see what, if anything, was learned from Japan’s so-called “Lost decade” in the 1990s, as well as the Great Depression, to which the turmoil is most often compared.

But few have gone as far back as Tadashi Kikugawa, a former hot-shot trader of Japanese government bonds, who was a key market source of mine over the years.   After working at brokerages including Goldman Sachs and Morgan Stanley, he left the high-octane financial world in May last year to run a small, private museum for ancient Egyptian art in Tokyo’s Shibuya district.

He began his own collection 10 years ago, when the JGB business was still very good, as prices were on the rise thanks to the Bank of Japan’s ultra-easy monetary policy after the burst of the bubble.

“The job stress was so overwhelming, so I found an escape in Egypt,” he told me.   The collection, which cost him part of his fortune, now amounts to about 1,000 pieces, with statues and other items.  

Is there any lesson to be learned from ancient Egypt?

“All that prospers must decline,” he said.  “The history of ancient Egypt is one of war over furtile land along the Nile River.

It’s a bit similar to the financial world I used to be in.”

from MacroScope:

Japanese lessons

Japan, slightly sidelined by the U.S.-UK "special" relationship and the Franco-German alliance at the G20 summit, is keen to stress the country can offer lessons to be learned from the country's banking crisis in the 1990s.

Here's a re-cap of what happened. In 1992, then-PM Miyazawa warned of a financial crisis unless banks were recapitalised using public funds now. Yet no action was taken. Between 1995 and 1997, staggering 5 financial institutions failed, forcing the government to inject public funds into 21 banks in 1998. Then two major banks were nationalised, then the government injected additional capital into 32 banks.

U.S. Treasury Secretary Timothy Geithner experienced the crisis himself as a financial attache at the U.S. embassy in Tokyo in the 1990s.

But how relevant are Japanese lessons to the global markets today?

"In some ways, Japan was lucky. Its lost decade was spent at a time when the global economy was recovering from recession. As a result, there was an opportunity for exports to grow," Ian Bright, ING economist, writes in a paper which won the Society of Business Economists' Rybczynski Prize.

"Today, the situation is different. The problems in financial markets are global rather than local. As a result, the chances of any one country finding solace in exports are slim."

The allure of free money

People say there’s no such thing as a free lunch. But in theory, a government can have one, some economists and Japanese politicians say, if it wishes to save the economy from deflation and recession. It should just print money and then spend it.

In the past few weeks, some members of Japan’s ruling coalition as well as economists have proposed such a move as the spectre of deflation looms in Japan, now amid what is likely to be its longest economic contraction in modern times.

And the idea, outlandish as it may sound, does not come from fringe economists — Nobel-laureate Joseph Stiglitz  proposed this remedy in 2003 as a way to bring Japan out of deflation.

Government spending would make up for the sharp fall in demand from the private sector, while printing more money could cause a minor loss in public confidence in money — a good thing.

Countries normally finance spending by issuing debt, effectively passing on the cost to future generations. But by simply printing money, the government can save the economy at no cost, proponents say.

Japan earnings: How low can they go?

For a company to be losing a lot of money is hardly surprising these days, but I was shocked last week when Hitachi said it would lose 700 billion yen this year, the biggest loss ever by a Japanese manufacturer.

Investors were also shocked, sending shares down 17 pecent the next trading day, wiping out $1.9 billion in market value.

The loss forecast, reaffirmed Tuesday, underscores how quickly the financial crisis is spreading from the banking sector to every corner of the world’s No.2 economy.

For investors watching Japan, the question is whether Hitachi represents the worst or the start of worse things to come. The answer lies in how soon companies restructure and shrink costs to match the new reality.

 The key differences between this downturn and 2001-2002 (when Hitachi lost $5 billion) after the collapse of the IT bubble are: Overall revenues are declining (they still rose in 2001 and 2002 on an aggregate basis); this slump is much wider and includes the all-important auto sector; and, the yen has surged.

Daiwa Institute of Research estimates the pretax recurring profit of 300 big non-financial companies will fall 12 percent in the next business year from April, after a 43 percent slide this year. Revenues are set to slide for two straight years.

The memory is getting hazy…

Japan’s last boom may have lasted six years but it was like a heat haze, Japanese Economics Minister Kaoru Yosano says, underlining complaints from many Japanese that they have missed out on the export-led growth spurt.

The global financial crisis has sent Japan into a deep recession yet many did not really enjoy the preceeding boom — officially Japan’s longest period of expansion since World War Two.

“I don’t have much talent as a copywriter, but I’d say it was like the air simmering with the heat, just dragging on,” Yosano says, using the Japanese word “kagero”, or heat haze, when asked how he would label the growth cycle.

The six good years were led by exports. These grew at an average annual rate of around 10 percent from the time it kicked off after the 2001-02 dot.bomb recession, against a growth rate of just 1.1 percent in personal consumption.

It’s all historical anyway, with a slew of data released on Friday showing Japan’s economy is likely shrinking at a record rate.

Japan missed the party, but it is suffering the hangover.

Photo credit: REUTERS/Yuriko Nakao

What can the Bank of Japan do?

Japanese interest rates have already dropped to just 0.1 percent, leaving the Bank of Japan with few traditional weapons to fight its corner of the global financial crisis as it meets on Wednesday and Thursday this week to review monetary policy.

It could, of course, return to zero interest rates, but Japanese policymakers are not convinced that this worked last time they tried it and, with rates already so low, how much difference would moving to zero make?

As Hideyuki Sano writes in our preview of the BOJ’s policy board meeting this week, Governor Masaaki Shirakawa and his advisers are more likely to consider less traditional ideas that are increasingly the weapons of choice for central banks, such as buying commercial paper from otherwise strong companies that can no longer raise funding themselves in gummed-up markets.

The BOJ’s policy could increasingly resemble that of the U.S. Federal Reserve, which has expanded its balance sheet with various securities from markets.

The numbers are not pretty. Industrial output fell 8.5 percent in November alone, and that matters a lot in a country where big manufacturers such as Toyota, Nissan, Sony, Panasonic and so on employ millions directly and indirectly.

Big firms are slashing investment and laying off temporary workers (and some companies a few permanent ones too) as the yen rises on investors’ view of Japan as a relatively safe place to park their cash amid the global meltdown.