Ten Scapegoats for Japan's Crisis

Japan’s debt-to-GDP ratio of 225 percent is the worst in the developed world. Standard and Poor’s has already downgraded the country’s credit rating, Moody’s has said it might follow suit.

The country, which has suffered nearly two lost decades, saw first-quarter gross domestic product (GDP) decline by 3.7 percent on an annualized basis.

Current Prime Minister Naoto Kan narrowly survived a no-confidence vote, but he has promised to quit as soon as the current crisis is over. If he does, the country would have to choose its sixth leader in as many years.

There is plenty of blame to go around for Japan’s dismal state. Click ahead to find out who the scapegoats are.

By Deepanshu Bagchee & Rajeshni Naidu-Ghelani
(Posted: June 8, 2011)

Japan’s politicians have been accused of not just being asleep at the wheel but of exacerbating the country’s problems. Party bosses have controlled power through a patronage system greased by pork barrel spending. Successive governments have overseen trillions of yen in spending on roads, bridges and buildings.

There’s no sign the spending will end. Parliament approved a $61 billion stimulus bill in November last year and the government estimates the cost of the recent tsunami and earthquake will total $310 billion.

Politicians have also been blamed for their inability to take tough decisions on reforms such as changing the tax and social security systems. The country is also constantly changing Prime Ministers, with five in under six years.

Japan’s consumers never fully recovered from the collapse of the country’s asset bubbles two decades ago.

Housewives are known to pinch pennies, even secretly saving their husband’s salaries, a phenomenon so widespread that it has a name — hesokuri. As a result, consumption has plummeted; domestic auto sales, for example, have fallen by half since 1990. That in turn has hurt the government’s ability to raise tax revenues

There are no signs consumers will give up their spendthrift ways any time soon. Consumer prices rose for the first time in 28 months in April, but retail sales are still down nearly 5 percent from a year ago. Consumer confidence has been further hit by the earthquake in March and most Japanese have begun to frown upon any form of conspicuous consumption after the disaster.

The lack of spending means prices keep falling and that encourages households to delay consumption even further.

Japan’s demographic time bomb keeps ticking. The population decline in 2010 was the worst since the government started keeping records in 1899. There have been more deaths than births in Japan for four years in a row.

A quarter of Japan’s population is now above the age of 65 and that number is expected to jump to nearly 40 percent by 2050, putting the social security system under immense strain. Immigration would be one way to solve that, but Japan’s tough immigration policies discourage foreign workers.

Japan’s fight with foreign speculators has been akin to a chess game and on the whole the country's Ministry of Finance has been on the losing end. The economy has been especially hurt by a strong Yen, which has appreciated from 133 versus the U.S. dollar in 2002 to around 80 currently. That’s hurt exports and profits for Japan’s corporate sector.

Japan intervened earlier this year in the currency markets only to see the currency surge to 76.25 after the March tsunami. That forced the G7 to intervene in the biggest coordinated currency move in the world. The government says foreign speculators have been betting on the repatriation of Japan’s large savings abroad to rebuild the economy.

Japan’s deputy finance minister, Fumihiko Igarashi called the speculators: “sneaky thieves at a scene of a fire.”

Japanese companies have moved production overseas to beat the stronger Yen. Automaker Nissan produces just 25 percent of its vehicles in Japan, while Honda makes just 26 percent of its cars at home.

A lot of the new factories have gone to China, given its undervalued currency and low cost of labor. That’s not all, Japan says it’s been posting trade deficits with China since 1997 and it's criticized the currency policies of China for worsening Japan’s competitive position.

On the other hand, China claims that by its measures, Japan actually enjoys a trade surplus, not a trade deficit with China.

The Bank of Japan has been criticized for easing monetary policy during the bubble era in 1985 and then for not doing enough when the bubble burst. As if those mistakes weren’t bad enough, the BOJ was criticized for raising rates prematurely in 2000 before the country had fully recovered.

The BOJ Governor Masaaki Shirakawa though has deflected criticism, blaming Japan’s demographics instead in a Wall Street Journal interview.

Belatedly, the BOJ has been on an asset-buying spree, but many say it’s too late because the central bank faces a liquidity trap — whereby no amount of monetary easing can help create demand for money.

Critics say much of Japan’s problems during the 1990s were caused by a banking system that failed to recognize its losses and kept rolling over loans to “zombie firms”. The major lenders have been accused of misallocating credit and distorting competition.

Today, Japan’s banks keep nearly 30 percent of their assets in low-yielding and safe Japanese Government Bonds (JGBs). But Brian Waterhouse, Senior Analyst at CLSA, who has more than 30 years experience working in Japan’s financial services sector says the lenders run a big risk if interest rates rise and their portfolios of JGBs fall in value.

The deadly earthquake and tsunami that hit Japan on March 11 are considered to be the world's costliest natural disasters. Direct damage from the catastrophic event is estimated to be $310 billion.

Its impact on Japan's economy has been crippling, derailing a budding recovery from the global financial crisis. Damage to the country’s auto and technology sectors has impacted the entire global supply chain.

The cost of reconstruction and disaster relief is weighing on a government already laden with debt.

Once revered for their innovation and efficiency, Japanese firms have been in the news of late for mishaps and safety problems. Even formidable Toyota, famous for its quality, had to apologize to consumers.

Critics say Japanese companies and their many layers of bureaucratic decision-making are to blame for a lack of accountability and innovation.

In the latest example, Tokyo Electric Power Company (TEPCO) was accused of mishandling the nuclear crisis, for failing to open pressure valves earlier to prevent a meltdown, and for failing to communicate more openly.  The President of the company Masataka Shimizu was blamed for largely disappearing from public view in the month after the tsunami.

Pictured: Toyota Chief Executive Akio Toyoda

Moody's, Standard & Poor's and Fitch Ratings have all been critical of Japan’s actions to meet its fiscal challenge. They’ve cited the country’s massive debt-to-GDP ratio. But critics say the ratings agencies are missing the point because of Japan’s huge amounts of savings. If that’s taken into account Japan’s net-debt-to-GDP ratio is just 115 percent.

Plus the country has nearly a trillion dollars in forex reserves. Analysts say Japan will continue to be able to borrow from domestic banks and government institutions. In fact, 50 percent of Japanese government bonds (JGBs) are held by the public sector and 90 to 95 percent of all JGBs are held by domestic investors, reducing the risk of an external funding crisis.