S&P’s Next Target Has Bob Marley on its Mind: William Pesek
On a hot Friday evening in Osaka, Japan, street musician Jun Fukuda is channeling Bob Marley on a downtown bridge. Not the feel-good, party-hearty Marley, but the mortality-questioning ballad “Redemption Song.”
As the 20-year-old belts out the lyrics “emancipate yourself from mental slavery” he scans the 20 or so Japanese hipsters gathered around to be sure they’re getting the point.
“There is no future in Japan for people like me,” Fukuda tells me, as a few of his buddies nod in agreement. “Our leaders are useless, our economy is bad, there’s nuclear stuff in my food. There is nothing out there for my generation.”
Herein lies Japan’s biggest problem as growth wanes, deflation deepens and radiation leaks in Fukushima. Economists predicting a recovery expect rebuilding after the March 11 earthquake and tsunami to drive growth the way it did in Kobe in 1995. Yet they ignore how the events of the last five months shook the Japanese psyche in ways that bode poorly for the world’s third-biggest economy.
Those “animal spirits” of which John Maynard Keynes spoke are unpredictable things. What Japanese of all ages see is a political culture overwhelmed by a combination of crisis, generational change and forces of globalization. Their economy has been overtaken by China, and no one knows how to catch up.
They know Naoto Kan’s days are numbered, and that Japan, perhaps by the end of August, will have its sixth prime minister in five years. They realize no strong candidates are waiting in the wings to put the country on a firmer footing.
All this means less household consumption in a nation that even before March 11 was saving too much. It means less business investment in an economy that was struggling before the ground under the northeast Tohoku region shook and the seas rose. It means greater uncertainty than Japan has seen in decades.
There’s still hope that the events of the last five months will catalyze Japan to reinvent itself. Yet I haven’t found a smidgen of evidence that real change is afoot.
Rather than taking steps to enliven growth, politicians are, as usual, relying on the Bank of Japan to take the lead. Instead of encouraging fresh alternative-energy research, lawmakers are digging in to protect the primacy of nuclear power. Bickering in Tokyo is delaying rebuilding efforts.
Is Tokyo looking anew at how to open its economy and create growth via freer trade? Nope. Is it moving to address an aging population by better using its female workforce or welcoming more immigrants? Of course not. Are legislators looking for ways to inspire growth with more innovative tax policies? Hardly. Are regulators strengthening corporate governance to create a more robust stock market? Definitely not.
Neither bold thinking nor heavy lifting is in the DNA of today’s Japanese leaders. There’s still no serious discussion of an alternative to adding to a debt that’s more than twice the size of the economy. With Standard & Poor’s yanking away the U.S.’s AAA credit rating, Japan should brace for its own downgrade. In January, S&P lowered Japan to AA-, the same level as China’s. Imagine what being rated lower than a developing nation would do to Japanese confidence.
The absence of new ideas can be seen in Japan’s recent currency intervention. That ill-fated exercise was the handiwork of Finance Minister Yoshihiko Noda, who is tipped to replace Kan. Noda doesn’t seem to understand what everyone else does -- that the yen is surging because of panic in global markets, not because of anything going on in Japan.
The yen will get even stronger as the dollar and euro lose favor -- deal with it. The lack of vision in Tokyo is affecting confidence as world events darken. Hong Kong’s slide toward recession shows that things are about to get worse. Its export- led economy is a highly reliable barometer of global growth.
We need to stop talking about Japan’s “lost decade” and begin mulling lost generations. Even before Fukushima there was the “Lehman shock,” a phrase that has great resonance among Japanese who watched contagion rush from Wall Street to Tokyo in the financial equivalent of a tsunami. Its effects were still being felt on March 10. Japan’s economy was already contracting and on the verge of its third decade of stagnation.
Forecasters have only begun to mull the countless knock-on effects from nuclear reactors leaking radiation into the skies. Ditto for Tokyoites fretting about the “Big One.”
The recent earthquake occurred along a different fault line, making seismologists wonder if it was a foreshock that affected pressure on the tectonic plates under Tokyo. A huge “What if?” is now a permanent fixture of day-to-day life in Tokyo, putting a damper on consumer and business spending.
Japan’s leaders have spent far too much energy in the past decade preserving entrenched ways of doing things. It’s time for economists and investors to emancipate themselves from their own kind of mental slavery. Japan’s best hope of a strong rebound will require fresh thinking about labor, energy, capital and the role of government. The average 20-something Marley fan can tell you that. Why can’t Japan’s leaders?
(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
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