FRIDAY, AUGUST 27, 2010
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Economy & Business A15 Anxiety over Japan’s economy deepens after grim reports
Strengthening yen is expected to undermine hopes for recovery
BY CHICO HARLAN
tokyo — Even by the standards of a country that has spent 20 years fretting about its economy, these are especially worrisome times in Japan. Several recent benchmarks — a succession of bad and worse news — have prompted calls for rare govern- ment intervention. Japan has been suffering from
the effects of deflation since the collapse of its bubble economy almost two decades ago, and the latest economic news offers little hope for recovery anytime soon. The yen is now strengthening, slowing export growth. An aging population is reducing the Japa- nese workforce. Diminished bank lendinghasmade it tougher for Japan to find long-range op- tions to end the doldrums. Taken together, Japan has new
reason to suspect that its econo- my, surpassed last week by Chi- na’s as theworld’s second largest,
faces painful months ahead. It seems likely to be aperiodwhena powerful yen pins down Japa- nese exports, undermining hopes of the financial recovery that seemed possible only months ago. Japan’s economy grew 4.9 percent in the first quarter, but just 0.1 percent in the second. On Wednesday, Prime Minis-
terNaotoKan held an emergency meeting with a pair of top lieu- tenants, including Finance Min- ister Yoshihiko Noda, to discuss possible government action to curb the yen’s rise. Only a day earlier, the yen, measured against the U.S. dollar, hit a 15-year high. In tandem, the Nik- kei stock index hit a new low for the year, falling below the 9,000 mark. Investors and economic ex-
perts clamored for countermea- sures, including a possible $20 billion stimulus package, and said Kan was responding too slowly. Some say Japan’s indecisive-
ness is linked to divisions in its ruling but weak Democratic Par- ty, which faces Sept. 14 elections to select its next leader — a de facto runoff to become Japan’s
As U.S. trade deficit widens, growth lags
trade from A1 Officials at Cummins Inc., an
Indiana-based maker of engines and power systems, say that business is booming in such places as China and India but that new orders for its equip- ment are being met largely at its factories abroad. “Almost everything we sell in
China is made in China, and those factories are at capacity right now,” spokesman Mark Land said. “The strength in those markets helps us overall, but our manufacturing capacity creates a limited need to export.” A range of companies in other
sectors considered important for U.S. trade offered other explana- tions for the recent increase in the deficit. Export revenue for staple U.S.
commodities, for instance, has been flat despite rising sales because prices are down. Prod- ucts that require a long lead time before delivery, such as aircraft, are enjoying a surge in overseas orders, but it could be years before that revenue is recorded. The United States typically
enjoys a trade surplus in the sale of civilian aircraft but the figure fell sharply in the first half of 2010 compared with the year before — a hangover from the recession that won’t work out of the system until perhaps 2012, said Boeing spokesman Tim Neale. Aircraft orders are in- creasing worldwide, he said, and the company is planning to ex- pand several production lines — but not until next year. “We have a backlog of $252
billion—firmorders justwaiting to be built,” he said. At a basic level, trade deficits
represent a loss of wealth for a country—money flowing abroad for goods and services produced elsewhere, supporting business- es and workers in other coun- tries. The United States remains the world’s largest exporter, and the planes, cars, equipment, food, services and other things it sells overseas accounts for hun- dreds of thousands of jobs at home. But the U.S. imports even
more, and the growing gap raises a number of sensitive political and economic issues for an econ- omy struggling to regain mo- mentum. Some economists blame re-
cord trade deficits — and short- falls in the broader current ac- count — for the 2008 financial crisis as the country lived beyond its means. The deficit fell dra- matically during the recession. But its return this year could amplify concern about U.S. over- spending and dependence on imported oil, feed into political tension with China over its cur- rency policies, and possibly un- dermine investor confidence in the dollar. Overall, June imports topped
$200 billion for the first time since the fall of 2008, while monthly exports fell to $150 billion, from $152 billion the month before. Macroeconomic Advisers, a fi-
nancial consulting firm, said its own analysis found that a June slowdown in the U.S. economy was the result of the trade deficit. The company said data indicate that importswill continue to rise — as they typically do after a recession — while exports are “trending sideways” said Ben
Herzon, an economist with the firm. It isn’t the trade deficit alone
that is undercutting economic growth or stoking talk of a double-dip recession. High un- employment, a drop in business inventory investment and a lag- gard housing market, among other things, are contributing. But economists warn that
countries cannot sustain ever- larger trade shortfalls, and the administration and the Interna- tional Monetary Fund among others have been seeking ways for countries with persistent trade deficits to trimthem. The effort seems to be facing
some stiff headwinds. U.S. trade officials, for exam-
ple, are betting that spending by foreign governments on roads, ports and other infrastructure will boost American companies. But it hasn’t happened yet: The country’s overall surplus in sales of capital goods fell from $13.4 billion in the first half of 2009 to $2.4 billion in the first half of 2010. Exports of pharmaceuticals —
another area U.S. officials point to as an export strength — have remained flat compared with a year ago, while imports have increased nearly 8 percent. Still, the sharp jump in the
June trade deficit might not be all negative. “This may be business catch-
ing up to the fact that people ran down their inventories,” said for- mer IMF chief economist Mike Mussa, who is now a senior fellow at the Peterson Institute for International Economics. “It takes longer for stuff to arrive on the boat, so there may be a sudden surge [in imports] for a fewmonths.” An increase in imports of
industrial equipment and sup- plies, for example, might reflect business investment that lays the groundwork for future economic activity. For instance, a growth in imports of auto parts may pres- age an increase in U.S. auto production and ultimately ex- ports. “The trade deficit typically
widens as theUnited States pulls itself out of a recession,” and begins to importmore oil, equip- ment and other goods, Francisco J. Sanchez, undersecretary of commerce for international trade, said in a written state- ment. The debate over possible re-
sponses is a broad one — includ- ing calls forObama to pushmore aggressively to open foreignmar- kets, and suggestions by both labor and industry groups that the United States craft tax and other policies that more directly support American manufactur- ers. Some lawmakers on Capitol Hill have also targeted China’s currency and other policies, al- leging that they give that coun- try’s companies an unfair edge. According to some analysts,
economic data show the United States struggling to exploit some of its traditional advantages. “We still think it is the 1950s
and ’60s and we are the domi- nant ones,” said Frank Vargo, vice president for international affairs at the National Associa- tion of Manufacturers. “Every- one is pouring money into R&D. What we are facing is an increas- ingly technologically competent world.”
schneiderh@washpost.com
prime minister. On Thursday, Kan’s rival, Ichiro Ozawa, an- nounced his intentions to run for the Democratic leadership spot. “There’s a leadership vacuum
between now and September, and that contributes to the prob- lems,” said Takatoshi Ito, an eco- nomics professor at theUniversi- ty of Tokyo. Though Japan hasn’t inter-
vened with the foreign exchange market since 2004, finance chief Noda indicated that the govern- ment seemed increasingly will- ing to do just that. “I believe we should take an appropriate re- sponse when necessary,” he said Wednesday. The Bank of Japan might opt
for its own emergency steps, in- cludingmeasures that ease fund- ing for lenders. On Wednesday the yen pulled
back slightly from its Tuesday 15-year high, when it measured 83.60 per dollar. But fears about Japan’s economy were com- pounded by the latest batch of statistics, released by the govern- ment, indicating that export growth in July slowed for the fifth consecutivemonth. Because of deflation-level prices, consum-
ers are less likely to spend on purchases that they believe will become cheaper in the future. As the nation depends less and
less on its own consumers, it has become increasingly reliant on export strength. A high yen makes Japan’s exported products costlier in overseasmarkets. Toy- ota has estimated that it loses 30 billion yen (about $350 million) for every 1 yen gain against the dollar. According to the Bank of Ja-
pan,manufacturers were expect- ing the yen to average 90 per dollar in the last part of 2010. Though economists describe
the yen appreciation as a short- term problem, reflective of bear- ish sentiment about the U.S. and European economies, they also warn of fundamentalweaknesses in Japan’s economy. Economists and Japanese me-
dia played down lastweek’s news that Japan had lost its spot to China as theNo. 2 economy.After all, Japan’s long fade and China’s rise had rendered the moment into an inevitability. But econo- mists also point out that Japan’s relative comfort — its gross do- mestic product per capita is near-
ly 10 times that of itsneighbor; its unemployment rate hovers around 5 percent—has created a false sense of security. Japan not onlymust copewith
a shrinkingworkforce and a soci- ety that is spending less money. It’s also facing massive debt — the result of years of big public projects. Meanwhile, according to a recent report by the Popula- tion Reference Bureau, Japan’s population will decline from 127 million today to 90 million in 2055. Outside groups and businesses
have beenlooking forways to fuel growth and consumer demand. Earlier this year the Japan Pro- ductivity Center, a nongovern- mental organization that moni- tors the economy, recommended that Japan perceive the Asian market as “an extension of the domestic market.” And indeed, according to experts, the bright- est spot in Japan’s economy might be its link with China. In the first half of this year
Japan’s total trade with China rose 34.5 percent, with boosts in Japan’s exports of automobiles and raw materials. Japan loos- ened visa restrictions, allowing
more of China’s nouveau riche to travel to Tokyo and spend their money. These days, Tokyo’s high- end Ginza shopping district has turned into a fiefdomfor Chinese shoppers, who emerge from tour buses and stockpile Prada and Louis Vuitton bags. For Japanese who witnessed
their country’s rocket-fueled growth from the 1960s to 1980s, before the bubble economy col- lapsed in the early 1990s, the sight is reminiscent of how Japa- nese consumers behaved 25 years ago — when the economy grew roughly 4 percent every year. In the larger sense, China and
Japanmake for natural partners: The former is a developing coun- try with an excess of labor. The latter is a developed countrywith a shortage of labor. “There has been an accelera-
tion of trade, and, for Japan, that’s where the growth is,” said RobertAlan Feldman, chief econ- omist for Morgan Stanley in To- kyo. “I do see more and more Japanese companies trying to exploit the Chinesemarket.”
harlanc@washpost.com
Special correspondent Akiko Yamamoto contributed to this report.
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