[Mb-civic] An oasis, not a mirage Economist

Michael Butler michael at michaelbutler.com
Wed Sep 15 10:01:25 PDT 2004



An oasis, not a mirage

Sep 14th 2004 
>From The Economist Global Agenda

The prospects for Japan¹s economy and its stockmarket still look rosy

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IF THIS week¹s column is a little intemperate, it is because for the past
week-and-a-half your columnist has been an ex-smoker. A better writer could
describe the cravings, the mood swings, the madness. Suffice to say that
Buttonwood¹s daughters were especially uncaptivated by the chicken
impressions at the weekend. It must be admitted that he has been an
ex-smoker before. Alas, a three-year stint in smoking-friendly Tokyo led to
relapse. But Buttonwood harbours no grudges, or at least not in this case:
in the parched desert of dismal prospective returns around the world,
Japanese stocks have stood out as a veritable oasis. And, unlike just about
every other rich-country market, the Japanese market has actually gone up
this year. But some of the recent numbers coming out of the country, which
have been dreadful, have necessitated the sort of questioning that in times
past would have called for a packet of fags. To be blunt: is the oasis in
fact a mirage?

The latest reality check came from Japan¹s revision of its second-quarter
GDP numbers on Friday September 10th. These had been pretty bad when they
were first released in the middle of August‹growth of 0.4%, compared with
the 1% that most economists had expected‹and pundits had dismissed them as
too awful to be believable: revisions were on their way, and big ones. Well,
the numbers were indeed revised, but only by a fraction, and in the other
direction: Japan apparently grew by only 0.3% in the second quarter. This
provided yet more ammunition to those who think Japan¹s recovery is

 There are still lots of them, and they wield arguments aplenty: the high
price of oil, a lack of domestic demand and the consequent reliance for
growth on exports to China and America, two countries that are not without
problems of their own. And, in the background, a sclerotic, corrupt and
pitifully ineffectual political system, which has failed Japan so
spectacularly in the long years since the popping of the bubble. The bond
market, which has been right for all of that time, is again registering its
despair. The 1.5% yield on the 263rd issue of ten-year bonds, though triple
what it was in June of last year, is still a lot less than almost all of its
predecessors, and down from 1.9% a few weeks back.

 Buttonwood has, of course, the utmost respect for traders of Japanese
government debt. However, as Arnold Schwarzenegger might say, the present
lot are a bunch of economic girly-men. Yes, Japan has its problems, but its
economy is on the mend. Odd though this may sound to those hardened in the
Japanese school of disappointment, the surprises for investors in the
country¹s stockmarket are more likely to be of the good sort, not the bad.
The Japanese establishment, as one economist put it rather neatly, has run
out of stupid things to do to wreck its economy, and the ³problems² that
Japan has‹huge and growing exports‹are problems of which the likes of
America can only dream.

 Which is partly why the GDP figures look so odd. Perhaps they can be safely
ignored: after all, Japanese economic statistics tend to be dodgy. For
example, one big drag on GDP, according to the number-crunchers, was firms¹
inventories, which fell even though they were already very low by historic
standards. Of course, even if the figures are right, firms are shifting so
many goods out of their factories that they will at some point have to
replace the stocks they have already sold, which will be good for growth. By
contrast, firms¹ investment growth was revised up a bit, to 4.9%. Yet a
survey by the finance ministry showed investment rising at double that pace.
That would be no surprise, for the simple truth is that Japanese companies
are fantastically profitable.

 Depending on what numbers you look at, profit margins are either higher
than at any time since the bubble burst, or their highest of modern times.
In consequence, Japanese companies as a group‹and not just a handful of
exporters‹are turning in wonderful profits. According to a survey by the
Nikkei, the country¹s main business daily, one in four listed Japanese
companies will make record profits this financial year. Non-financial firms
expect their profits to rise by 16% this year. Although this is less than
last year¹s 27%, it will almost certainly be revised upwards.

Companies have used a lot of this money to pay off all of those debts they
piled up in the bubble years. Japanese corporate balance sheets are now in
their best shape in decades, and at some stage in the none-too-distant
future companies will have the confidence to start investing a lot more than
they have done in recent years. That is when the virtuous circle could
really kick in. Fearful for their jobs‹the unemployment rate hovers near
5%‹Japanese consumers have been loth to open their wallets. When companies
start to invest and hire again in earnest, consumers will start to spend.

And the economy will grow still more strongly, presumably boosting profits.
True, by the standards of other countries¹ stockmarkets, Japanese equities
are not a giveaway: Topix, the broad stockmarket index, trades at a
price-earnings (p/e) ratio of some 19 times this year¹s earnings. But by the
country¹s own standards, they are mouth-wateringly cheap: in each of the
rallies of the 1990s, the p/e was four times that. For what it is worth,
shares in Japan Tobacco, the world¹s third-largest tobacco company, are
already up by 14.5% this year. But Buttonwood no longer smokes, even

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