[Viewpoint] Japan’s troubling ‘BP Moment’You never want to kick a nation when it’s down but It’s time to consider the depth of Japan’s coming recession.
A week ago, before radiation fears prompted a mass exodus from Tokyo, the downturn was of the “if” variety. Japan’s prospects then dimmed with each passing day of blackouts and panicked news reports. The questions now are when the recession will officially begin, how bad it will be and when might it end?
There’s this bizarre notion that Japan’s crisis is a nonevent for the world economy - that at just 9 percent of global gross domestic product, Japan’s zigs and zags mean little. And besides, it’s thought, the Group of Seven stepped in to cap the yen and all’s well again. Perhaps. Yet Japan’s near-term trajectory may surprise the global bulls out there.
The G-7’s intervention halted the yen’s rally to a postwar high of 76.25. It was a rare success for a grouping so out of its depth as America’s economy burned in 2008 and Europe’s debt crisis heated up in recent months. The G-7 showed that multilateralism may be making a comeback.
The international response to Japan’s disaster has been rapid, heartfelt and genuine. China and other regional rivals put aside contentious issues and Asian relations will be better off for it. There’s also reason to hope this crisis catalyzes a sclerotic leadership class to put Japan on a more dynamic course. Count Sony Chairman Howard Stringer among those who hope recovery efforts will jump-start the lagging economy as the country uses savings to rebuild.
Yet the fallout from what some pundits call Japan’s “BP moment” is broadening as we speak. In a perfect world, rebuilding efforts would help GDP in the second half of 2011. Lots of infrastructure needs to be restored in Japan’s northeastern Tohoku region, which accounts for roughly 8 percent of the economy.
The trouble is the intangibleness of Japan’s situation. Many worry that aftershocks and rolling blackouts following the March 11 earthquake are with us indefinitely. That augurs poorly both for business investment and household spending for the remainder of 2011. Household savings may soar as the Japanese worry about another huge temblor or tsunami.
Events at two of Japan’s most fabled names, Toyota and Sony, tell the story. Both face worst-case scenarios of long-term production shortfalls as scores of plants remain closed and workers are idled. And this will be playing out for weeks, if not months, to come as the nuclear reactors Japan Inc. took for granted stay offline.
Myriad other industries will be affected as shipments of chemicals, plastics, steel and other metals, precision ball bearings and electronic components are disrupted indefinitely. It’s certainly possible that reconstruction efforts near Sendai will pick up some of the economic slack, but not all.
Let’s consider, too, the nascent backlash against all things Japanese. It started with sushi. In Hong Kong, the Mandarin Oriental International Ltd.’s flagship and the city’s Four Seasons Hotel stopped buying food from Japan. In Taiwan, a small amount of radiation found in a shipment of peas is the first case of such contamination on imports from Japan, the Associated Press reported yesterday.
A backlash in mainland China would be especially painful. China turned away a Japanese cargo plane operated by All Nippon Airways Co. at Dalian airport. Authorities said the plane’s shipment, which departed from near Tokyo on March 16, had radiation levels that exceeded limits. A sense of wariness about the Japan brand among 1.3 billion can’t be good news for Asia’s second-biggest economy.
Of course, all this could be a boon for value investors. In the days before the quake, Goldman Sachs and David Herro of Oakmark International Fund were among those viewing Japanese equities as significantly undervalued. Even Marc Faber, publisher of the Gloom, Boom & Doom report, says it’s time to buy and hold Japanese stocks. Well, now they are cheap for sure.
Yet on top of the uncertainty factor emanating from the Fukushima Dai-Ichi nuclear power plant, Japan is afflicted by political paralysis. Prime Minister Naoto Kan invited the head of the largest opposition party to join his cabinet to build political support for its battle to contain the nation’s deepest postwar crisis. Sadakazu Tanigaki, who leads the Liberal Democratic Party, declined.
Folks, this is no time for partisanship.
Japan didn’t enter this crisis in a position of strength. Its economy shrank at an annualized 1.3 percent rate in the three months that ended Dec. 31. Even before the quake, Japan had the world’s largest public debt and arguably the lowest interest rates.
And now this. The surge in the yen, as traders front-run a massive repatriation of money to Japan by insurance companies, is a reminder that the quake is the stimulus package that Japan didn’t want.
There’s every reason to think Japan will bounce back in the long run. Unless Japan gets a decisive handle on this uncertainty factor, its prospects will darken in the short run.
Still think that’s not a worry for the global economy?
*The writer is a Bloomberg News columnist.
By William Pesek