Commentary: This Time, Japan’s Gloom Runs Deeper

Ken Belson

Traders here are fond of joking that no one has lost money betting against Japan since the collapse of the bubble economy of the 1980s.

Yoshikazu Tsuno | AFP | Getty Images

More than two decades later, the Nikkei 225 stock index is still three-quarters off of its peak. And the economy has been hit by blow after blow, from sagging property prices to mounting debts and intensifying competition from China.

Add an aging population, a lack of jobs for college graduates and persistent deflation and you can see why Japan’s so-called lost decade is a misnomer. Japan has lost decades — plural, not singular.

Natural disasters could be added to the list of economic shocks, notably the earthquake that leveled Kobe in 1995, and, in March, the earthquake and tsunami in northeastern Japan and the nuclear crisis in Fukushima that followed.

In a perverse way, after suppressing growth initially, Japan’s catastrophes have repeatedly jump-started the economy. But such good times generally have not lasted. Japan’s economy rebounded in late 1995 and 1996, for example, before tax increases and the Asian financial crisis plunged the country back into recession, a roller-coaster ride that I covered as a reporter here.

Four months since the triple disasters, there are early signs of another rebound. Carmakers are resuming production, gasoline shortages have disappeared and roads and homes are being rebuilt. Many economists say they expect a “V-shaped” recovery; indeed, the Nikkei 225 index has risen 18 percent since March 15, four days after the earthquake.

But since I returned to Japan in March, it has seemed that the impact of these disasters is far more profound than that of the 1990s quake — a difference that investors in Japan-related mutual funds may want to consider. As a whole, Japan stock funds gained 2.4 percent in the second quarter, and more than 15 percent over the last 12 months, according to Morningstar. Those numbers aren’t bad at all — but the recovery clearly has much further to go.

While the damaged reactors provided electricity to the Tokyo region, fears about the safety of the nuclear industry have led to the shutting of many other reactors, prompting utilities across Japan to ask customers — including the largest manufacturers — to use less electricity. If the reactors are not restarted, shortages could persist into next year.

“This story isn’t over like the Kobe earthquake,” said R. Taggart Murphy, who teaches in the M.B.A. program in international business at the Tokyo campus of the University of Tsukuba. “Once you get inside and see the short-term consequences, things will be pretty bad. You can’t replace that power right away.”

The size and scope of the current disaster are also much larger than those of the Kobe earthquake. The costs to rebuild Tohoku — the northeast region hardest hit by the quake — and to clean up Fukushima are expected to be so large that lawmakers are planning to double the national sales tax, to 10 percent, a move that might send the economy into a tailspin.

Having lived here for a dozen years, I am accustomed to hearing gloomy predictions. Some specialists have predicted that Japan’s economy will be swallowed by China’s. Others say Japan is the next Switzerland, a stable country with a shrinking role in the global economy. For a while, it was even in vogue to compare Japan to Zimbabwe, another country with a large debt burden.

THESE analogies all exaggerate conditions here to one degree or another. But, for the moment, the clouds that hover over the country seem even darker than usual, and the silver lining is harder to find because of the effects of the triple disasters.

Government estimates peg the reconstruction costs at as much as 25 trillion yen ($312 billion), a figure that private specialists say is conservative. Japanese investors buy a vast majority of government bonds, so lawmakers do not have to worry about a Greek-style financing crisis set off by the fears of foreign bondholders.

Nonetheless, relying mainly on debt financing would add to fiscal risks stemming from an already high level of public debt, which at more than 220 percent of gross domestic product in gross terms is the highest among advanced economies. Japan will face mounting pressure to cut spending and raise taxes to keep interest payments from overwhelming its budget.

Is there a silver lining?

Optimists note that Japan still has an ample trade surplus and foreign-exchange reserves, and a high savings rate that can be harnessed to pay for the transformation of the economy into, say, a leader in renewable energy.

But some of the money will almost certainly be used to import more foreign oil and natural gas to offset the loss of nuclear power. The government may also nationalize all or part of the Tokyo Electric Power Company, which owns the crippled reactors in Fukushima. The loss of faith in Japan’s nuclear industry may also hurt Hitachi, Toshiba and Mitsubishi Heavy Industries, major companies that hoped to win lucrative deals to build reactors overseas.

Meaningfully, all the money and time spent rebuilding the country will mean less money and time spent addressing Japan’s other problems, including the burden of its demographics, the stagnant job market for young people and its declining economic competitiveness.

In some ways, the gloom reminds me of a New Year’s party hosted by the Long-Term Credit Bank in 1998 during the height of the banking crisis here. At the bank’s headquarters in Tokyo, hostesses in white satin blouses and red velvet skirts, in grand bubble-era style, ushered me into a room of bank executives and other journalists. But instead of engaging in the raucous backslapping common at parties during good times, this group was more subdued, and for good reason. By the end of that year, the bank, the once-proud financier of Japan’s postwar revival, would be nationalized and thousands of its jobs would be lost.

That night, I met Shoichiro Koike, who long worked in foreign exchange for the bank. Over lunch recently, he shared his prognosis for the economy, no doubt informed by his experience at his former employer.

“I’m telling my clients to think the unthinkable,” said Mr. Koike, now a certified financial planner and author.

If the government keeps borrowing heavily, he said, it will ultimately have to look overseas for money, and foreigners are unlikely to be as forgiving as Japanese insurers and banks that hold the bulk of its debt. The best Japanese companies will move yet more operations overseas, he added. And individual Japanese investors will hoard more cash rather than spend it on homes, cars and other big-ticket items.

Mr Koike and others are careful to distinguish between the broader economy and Japan’s many first-class companies, which may be strong enough to justify investing in a Japan-focused fund.

Taizo Ishida is lead manager of the Matthews Japan fund, which gained 3.8 percent in the quarter and more than 26 percent in the last 12 months. He noted that companies like Nidec Motor Corporation, a maker of small motors, has most of its production outside Japan and is in a niche that, for now, has not been tapped by rivals in China, South Korea and Taiwan.

And while the yen is near an all-time high against the dollar, you do not hear the protests from exporters anymore because “practically every company is talking about cost-cutting,” Mr. Ishida said. “Eighty yen today is not the same as 80 yen in 1994.”

He cited cost-cutting and production’s moving offshore as why he expected pretax corporate profits in Japan to grow about 30 percent in the fiscal year that begins in April 2012, after declining about 5 percent this year.

Home builders, truck and machinery makers and manufacturers of solar panels like Sharp and Sanyo may also get a lift from the government’s reconstruction efforts, others said.

Still, eliminating jobs and closing factories is unlikely to provide much hope in a country that craves stability. Nor do lawmakers seem capable of finding creative solutions to these and many of Japan’s other problems, Mr. Ishida said. That, he added, “is bad news for the economy.”