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Latin America, Middle East markets beckon Japanese investment
By Sun Lijian |
January 9, 2009, Friday
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Print Edition
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CONFRONTING the US economic crisis, export-dependent Japan is suffering great loss due to declining overseas demand.
Japan represents the East Asian growth mode that depends on manufacturing exports to European and US markets. At this time there is no effective way to stimulate overseas demand, nor is the potential of domestic demand large enough to sustain Japan's economic growth.
One way to ensure Japan's financial growth is to enhance its financial institutions' ability to invest overseas, especially in emerging markets such as Latin America and the Middle East.
Soon after the US economic crisis unfolded, Japan experienced negative economic growth in the second and third quarters last year.
US and European sales of its high-tech and high value-added products have stagnated since the middle of last year.
Many Japanese enterprises that were making profits in the first half of the year last year suffered serious liquidity problems from consumers' reduced spending power, banks' credit squeeze, and limited credit.
A major reason for this is the rapid price increase of bulk commodities last year and the appreciation of yen as a result of reduced trading conducted in yen. In this strategy, an investor sells a given currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate.
The US financial tsunami led to a global liquidity panic. The purchasing power of American consumers was weakened, so was their demand for high value-added products.
Meanwhile, the purchasing power of consumers in other countries was seriously weakened in the damage to the world's capital market. This too reduced demand for Japanese products.
In these cases, stimulating domestic demand seems to be one approach. Indeed, there has been no decline in Japan's domestic consumption as yet - nor is there a decline in China. On the contrary, there is even slight increase in the consumption by core Japanese families of a young couple and one child.
After all, layoffs in enterprises are mainly targeted at people at middle and senior levels with higher incomes. They don't affect young couples as much. Rather, reduced product prices stimulate young people's real demand that had been suppressed by previous high inflation.
But this cannot save Japan's economy from recession.
A better solution
Most spending by these people goes to daily necessities for the family. Moreover, young people's purchasing power is limited. If the recession continues, they're likely to increase their savings, as do their parents.
Besides, given Japan's extremely low birth rate, economic growth cannot be significantly stimulated by expanding domestic demand.
Japanese fiscal capacity has been limited for more than a decade. Therefore, although the Japanese government aims to stimulate domestic demand by reducing administrative spending and taxes for enterprises while raising consumption tax, these policies take time to become effective. A better solution is for the Japanese to enhance their ability to manage their wealth.
Although Japan's zero interest rate policy has motivated many families to turn to investments with higher returns, especially overseas, the average percentage of savings compared with total family assets is much higher in a Japanese family than in an American family.
(The author is professor of finance and executive vice dean of the School of Economics at Fudan University.)
Japan represents the East Asian growth mode that depends on manufacturing exports to European and US markets. At this time there is no effective way to stimulate overseas demand, nor is the potential of domestic demand large enough to sustain Japan's economic growth.
One way to ensure Japan's financial growth is to enhance its financial institutions' ability to invest overseas, especially in emerging markets such as Latin America and the Middle East.
Soon after the US economic crisis unfolded, Japan experienced negative economic growth in the second and third quarters last year.
US and European sales of its high-tech and high value-added products have stagnated since the middle of last year.
Many Japanese enterprises that were making profits in the first half of the year last year suffered serious liquidity problems from consumers' reduced spending power, banks' credit squeeze, and limited credit.
A major reason for this is the rapid price increase of bulk commodities last year and the appreciation of yen as a result of reduced trading conducted in yen. In this strategy, an investor sells a given currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate.
The US financial tsunami led to a global liquidity panic. The purchasing power of American consumers was weakened, so was their demand for high value-added products.
Meanwhile, the purchasing power of consumers in other countries was seriously weakened in the damage to the world's capital market. This too reduced demand for Japanese products.
In these cases, stimulating domestic demand seems to be one approach. Indeed, there has been no decline in Japan's domestic consumption as yet - nor is there a decline in China. On the contrary, there is even slight increase in the consumption by core Japanese families of a young couple and one child.
After all, layoffs in enterprises are mainly targeted at people at middle and senior levels with higher incomes. They don't affect young couples as much. Rather, reduced product prices stimulate young people's real demand that had been suppressed by previous high inflation.
But this cannot save Japan's economy from recession.
A better solution
Most spending by these people goes to daily necessities for the family. Moreover, young people's purchasing power is limited. If the recession continues, they're likely to increase their savings, as do their parents.
Besides, given Japan's extremely low birth rate, economic growth cannot be significantly stimulated by expanding domestic demand.
Japanese fiscal capacity has been limited for more than a decade. Therefore, although the Japanese government aims to stimulate domestic demand by reducing administrative spending and taxes for enterprises while raising consumption tax, these policies take time to become effective. A better solution is for the Japanese to enhance their ability to manage their wealth.
Although Japan's zero interest rate policy has motivated many families to turn to investments with higher returns, especially overseas, the average percentage of savings compared with total family assets is much higher in a Japanese family than in an American family.
(The author is professor of finance and executive vice dean of the School of Economics at Fudan University.)
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