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April 9, 2013

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Home » Opinion » China Knowledge

Japan lacks competitive companies

April 9, 2013, Tuesday | Print Edition

EDITOR'S note:

Japanese Prime Minister Shinzo Abe wants to pull Japan's economy out of two decades of stagnation and deflation. It turns out that his policies resemble past efforts, but he wants to put far more firepower behind them this time.

He aims to relax already loose monetary policies and raise government spending to boost demand. Some analysts say it's just the medicine Japan needs and, on the spending side at least, the opposite of what Europe and the US are doing. But Wharton finance professor Franklin Allen, in an interview with Knowledge@Wharton, says the plan carries serious risks. An edited transcript of the conversation:

Q: Fiscal stimulus and loose monetary policies have been tried many times in Japan, but critics say these were half-measures in the case of monetary policy, and that the stimulus was withdrawn too soon before it was able to jump-start the economy. This time, it looks like a real shake up.

A: If something doesn't work very well, what should you do? Should you try something else, or should you try harder?

Up until now, the conclusion has been that we should try something else. And now, Abe has brought back the issue of, well, let's try harder at what we did and try again.

Part of that is driven by what the Japanese see going on in the US and in Europe, where we have central banks essentially going out and, in the case of the US, with quantitative easing, buying large amounts of bonds on a regular basis and printing money to do it.

And in Europe, in the European Central Bank, we see with the outright monetary transaction program the potential for the ECB to also buy out very large amounts of government bonds.

Prime Minister Abe wants to go out and start giving the Bank of Japan a much higher inflation target - 2 percent rather than the current 1 percent. He also wants to have fiscal stimulus and to have more bond buying, more purchase of assets by the Bank of Japan.

What will be the effects of these actions? If you do it in small amounts, it seems as though it doesn't have that much of an effect.

One of the other views was that this quantitative easing has an effect, but it has a big effect on emerging economies. If we look at what's happened in Brazil, there has been a huge run up in asset prices. The currency has strengthened a great deal, and that put their manufacturing sector under tremendous strain. And growth in Brazil is now stopped.

Exactly what kind of an effect will happen with Japan remains to be seen. We don't know what happens if you go out and have these long-run bond buying programs. It seems as though they haven't been too successful in Japan in the past. Maybe they didn't try hard enough.

But there is a long loss of competitiveness among many Japanese companies. If you look at companies like Sharp and Panasonic, it's not at all clear that these companies, which 10 to 20 years ago dominated their industries, are going to be able to survive.

And I think a part of this is that these monetary measures have pernicious long-term effects.

If we try them even harder, we may have inflationary effects.

Q: Japan is doing monetary stimulus and trying to hit a 2 percent inflation target because they've had deflation for so long. Of course, inflation is a two-edged sword. A little bit might be a good thing, but then how do you keep it at a little bit and not go beyond that?

A: You can't guarantee that inflation is only going to be 2 percent. And it could well be that we suddenly get a wave of inflation because, for example, if households start to worry about what's going to happen to interest rates, they may suddenly move money out.

Q: As difficult as it is to look ahead, what do you think is most likely to happen in Japan over the next six months to a year?

A: The usual view is that Japanese companies will do much better with a weaker yen, and there are various calculations as to how much the profits of Toyota and Honda and the other Japanese companies will improve for each change of yen against the dollar.

Certainly, there are those short-run effects. Company profits are likely to go up, and the stock markets reacted.

But in the long run, it doesn't seem that this solves their problems, because if you look back over the last few years, the exchange rate has varied a great deal and it has never really gotten them back on track.

This is the thing that they need to worry about. They may do better over the next few months. Exchange rates do help in the short run. But they have a real long-term competitiveness problem.

If you think about Samsung and LG, these companies are doing much, much better than Sharp and Panasonic or even Sony. It's not just electronics now; it's also in the auto industry.

I think this is Japan's long-term problem. The real difficulty is that they are not the strong, competitive economy that they used to be.

Adapted from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the original, please visit: http://www.knowledgeatwharton.com.cn/index.cfm?fa=article&articleid=2742

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