Summit Notebook

Short-term hopes, long-term gloom

By Tomasz Janowski

Optimism that Japan’s economy will bounce back from a post-quake slump and pessimism about its long-term prospects is the prevailing message of economists addressing the Reuters Rebuilding Japan Summit.

The reasons for the near-term optimism are well known: strides made by Japanese manufacturers in restoring production and supply networks ripped apart by the March 11 earthquake and tsunami and expectations that sooner or later hundreds of billions of dollars spent on rebuilding the ravaged northeast coast will grease the wheels of the stuttering economy.

There is also little doubt about what has been holding back Japan, which has been in and out of deflation and recessions over the past decade.

Its society is aging faster than any other nation, the productive (and consuming) population is shrinking, its manufacturers keep shifting operations abroad where wages are lower and markets grow and its debt burden makes it impossible for Tokyo to engage in any grand-scale pump-priming.

Now, one can also add concerns that a shift away from nuclear power will bring higher costs and doubts about reliability of electricity supply and possibly accelerate the hollowing out of the manufacturing sector.

Looking forward to inflation

By Tim Kelly

Yoshiharu Hoshino, the president of Hoshino Resort, one of Japan’s leading resort operators, is looking forward to a dose of inflation after years of sliding prices.

By engineering a rise in rates by printing money, he reckons Japan can make a big chunk of its burgeoning national debt disappear, which along with tax hikes is, he predicts, likely the way Japan is going to exit a potential crisis as debt soars to more than twice its gross domestic product.

While having the nasty side affect of making assets worth less tomorrow than today, if, like Hoshino, you borrow money to buy the bricks and mortar of hotels, the plus side is your debt, relative to your cash flow will also get smaller as long as you have low rates locked in.

“It would be a very big plus,” said Hoshino told the Reuters Rebuilding Japan Summit in Tokyo.  Japan defaulting on its debt is unlikely, he said.

Resort owners who agree with Hoshino, who already own 27 facilities in Japan, may therefore be tempted to borrow more to buy more and wait for robust inflation to pay the loans back.

Suntech eyes Japan growth

By Leonora Walet

Suntech Power may be the world’s biggest solar panel maker but it trails Sharp, Kyocera, Panasonic and Mitsubishi Electric in the fast-growing Japanese solar market.

Now, the company is set to take on these Japanese rivals on their home turf and aims to double its market share in the country to 10 percent next year.

The catalyst? The expected adoption of a special tariff, now being discussed by lawmakers, on power from solar panels to lure investors to bigger projects.

Japan’s ambitious plan, if implemented, to get solar panels on the roofs of every new building would of course also give the market a hefty boost.

“We need to take market share from the top four. Our immediate goal is to pass Mitsubishi,” Yutaka Yamamoto, Suntech Power Japan president, told the Reuters Rebuilding Japan Summit in Tokyo.

When debt monetisation makes sense

If push comes to shove and Japan runs into difficulties finding buyers for its low-yielding government bonds, a little debt monetisation — a dirty word for central banks — would not be a bad thing.

Tomoya Masanao, managing director and head of Japan portfolio management at PIMCO, told the Reuters Rebuilding Japan Summit that if private investors are not willing to buy JGBs, then the central bank should fill the breach.

“If the Japanese private sector does not have enough ability to fund the government, it’s natural that the central bank should step in,” Masanao said.

Such a move would weaken the currency, and that would be a positive for an economy that is now grappling with a strong yen on top of the many other economic challenges it is facing.

For now, Japan faces no such threat of private investors being unable to lend the government a hand. As Masanao noted, Japanese corporations and households tend to save even more money when the fiscal deficit rises — as is almost certain as government reconstruction spending kicks in after the massive March 11 earthquake, tsnuami and nuclear scare. Indeed, a chart below shows the remarkably strong relationship between government borrowing and household savings over the years.

Benchmark Japanese government bond yields are hovering near 1 percent and have only breached the 2 percent threshold twice since falling below that level in 1997. As the population ages, household savings rates have fallen. But with household financial assets at $18.5 trillion — and a little more than half of that kept in cash and low-yielding bank deposits — the supply of funds heading into JGBs remains ample, even with debt set to surpass 200 percent of Japan’s $6 trillion GDP this year.

With the euro zone debt crisis raging more than a year later, the question of whether Japan faces its own debt crisis has been hotly debated. Still, the trigger for any Japan debt crisis remains far off and will be of a much different nature than Europe’s troubles. Beyond its savings, Japan enjoys steady trade surpluses (despite the record deficit coming out of the disaster), and for that reason does not rely on foreign investors . Of course, the Bank of Japan already buys a hefty chunk of government bonds, even while arguing this does not equate to monetisation and fighting against any pressure to monetise.

Perils of disaster fixation

By Tim Kelly

Fixated on reviving the shattered northeastern seaboard, Japan risks neglecting growth in the rest of the economy, warns Takeshi Niinami, CEO of Lawson, Japan’s second-biggest convenience store operator.

“The question is what do you do about the other 95 percent of the economy,” Niinami told the Reuters Rebuilding Japan Summit in Tokyo.

His remedy: throw Japan open to the rest of the world and deregulate, policies more in vogue before Japan’s March 11 earthquake than since.

Niinami wants Japan’s politicians to rediscover their pre-quake appetite to thrust Japan into trade pacts either with Southeast Asian economies or the Trans-Pacific Partnership, a policy that Prime Minister Naoto Kan enthused about at the start of the year but since March 11 has dropped.

Opening up Japan is not just about letting foreign people, ideas and capital in, he says, but also about companies moving out.

Hard road on Japan’s nuclear policy

By Kevin Krolicki

Suddenly Taro Kono doesn’t look like quite the lonely maverick in Japan’s Liberal Democratic Party.

Kono, a member of the lower house of parliament, has been an unrelenting critic of Japan’s pursuit of nuclear power since he was first elected in 1996. That made him an odd fit with the LDP, which ruled Japan almost continuously from the mid-1950s to 2009 and put nuclear power at the center of Japan’s energy policy.

“For the past 15 years, it has felt like Taro Kono against the LDP,” he told the Reuters Rebuilding Japan Summit.

But since the Fukushima Daiichi accident triggered by the March 11 earthquake and tsunami, Kono’s call to scrap nuclear in favour of renewable energy and conservation has moved from the fringe to something closer to the mainstream of political opinion.

About 50 lawmakers attended a recent study group he sponsored on energy policy, out of 722, and Kono sees a prospect for a kind of “green alliance” between sympathetic LDP lawmakers and some in the Democratic Party of Japan.

Nikkei recessive exuberance

If the Nikkei’s spring rally from multi-decade lows whet appetites for a “Japan is back” soaring benchmark, it’s time to check that excessive exuberance, says Deutsche Securities’ Naoki Kamiyama, who sees a top of 10,500 yen for the Nikkei 225 and 1,000 for the Topix over the next year.

No one was expecting a return to 30,000 or even 20,000 for the Nikkei, which has found upside tough after a recent crack above the 10,000 line. But the veteran of many years of Japan asset-watching says market optimism is now meeting reality, with gains of less than 10 percent from current levels likely.

“Earnings are not on the rise, so the price-to-earnings ratio will remain high,” he told the Reuters Japan Investment Summit. “We’re at an important turning point where stocks have priced in a certain recovery, but the extent of that is not enough.”

After the worst year in Japanese trading history that drove the Nikkei down 42 percent amid a global financial crisis that left far greater carnage than just equity prices, a relatively moribund Nikkei seems a minor concern. But there are some buys out there, Kamiyama says.

He thinks financials may outperform with recovery in the sector, along with exporters, which will enjoy a mildly weaker yen. Not surprisingly, resource-linked firms will remain in favour, as world demand rekindles.

So if Japan’s market is capped, what is the strategy if global recovery does emerge? Buy Japanese exporters, shippers and trading firms now, then switch to China plays once a more pronounced recovery is confirmed. And — unlike the Nikkei – be aggressive.

Video – Japan finance firms looking global

The rest of the world is feeling the global credit crunch, but Japan’s cash-rich firms are looking to expand overseas.

Dan Sloan reports.