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TokyotoEffects of Global Economic Recession on Tokyo’s economy
“We’re in a very bad way at the moment and things are getting worse. Tokyo is no longer in a recession — it’s in a depression.”
James Malcolm, senior economist at JP Morgan Securities (Asia)
Following the September 11 terrorist attacks on the United States and the outbreak of mad cow disease, economic analysts were predicting the onset of an economic recession in Japan. Some economists predict that the current global economic recession may even lead to economic depression of the world’s second largest economy.
This pessimistic forecast on Japan’s economy could be justifiable in view of the fact that Japan has been in the throes of one the worst economic recession since the end of World War II (Mochizuki, M. 1995, p. 25). Mochizuki cited that since 1988, Japan’s annual growth rates in terms of real gross domestic product (GDP) have “fallen sharply” (p. 25). Although Japan had also experienced growth from 1994, Mochizuki noted that the nation’s economic recovery remains weak leaving the Japanese economy vulnerable to global economic recession. Currently, three factors are seen causing economic recession in Japan namely; the Collapse of the bubble economy, the Excessive productive capacity, and the Yen appreciation.
One important indicator of the bleak outlook for the Japanese economy was the Bank of Japan’s Tankan survey of the business condition in Japan. The Tankan’s quarterly diffusion index, which measures the percentage of major manufacturers, pointed out that although the economy is likely to recover in the first half of 2009, yet it admit that the market weakness is expected to continue into the first quarter of December 2009 (Shaw, par. 2).
Amidst this bleak market condition in Japan, the government’s goal to make the country’s financial capital a global financial center may not be possible given the present vulnerability of the country’s economy. There is no doubt that Tokyo occupies prominent place in the economic ranking of the world’s major economies. Tokyo has been the home of fifty of the companies listed on the global 500, had a total GDP of US$1,191 billion, with a population of 35.2 million, and GDP per Capita of 33.8 in 2005 (PricewaterhouseCoopers 2007, p. 18). Furthermore, as one of the world’s financial center, Tokyo houses the headquarters of several largest investment banks and insurance companies, and serves as a hub for Japan’s transportation, publishing, and broadcasting industries. During the centralized growth of Japan’s economy following World War II, large firms moved their headquarters from cities such as Osaka to Tokyo, to take advantage of the city’s business climate. However, this trend gradually slowed down due to the high cost of living.
Vulnerability of Japanese economy
Despite of this economic feat, Japan’s vulnerability to global recession is affecting Tokyo’s economy. In her article entitled “Economy-Japan: Hurting from Global Recession” Catherine Makino pointed out that since October 8, 2008 Tokyo’s stock market sunk 9.2 percent which according to some analysts is a clear indication of the vulnerability of Japanese economy.
With most of the economic circumstances pointing to Japan’s weakening economy the Government’s effort to make Tokyo a global financial center may not be possible until 2020. This is because aside from the looming economic recession, Japan is experiencing economic stagnation exacerbated by the problems in the rest of Asia (Meyer, D. 2000, p. 236). David Meyer noted that Japanese firms invested heavily in the region and their losses “inflate the already huge portfolios of worthless loans of Japanese banks, especially in Tokyo, who financed that investment” (p. 236). Furthermore, Meyer cited that Japan’s weak financial regulations and disproportionate bank lending to speculative real estate projects left enormous amount of bad debts on the balance sheets of banks in other countries which have been enlarge by currency depreciation as large share of these loans are denominated in US dollars (Meyer, p. 236).
Two other problems confronting the Japanese economy and blocking Tokyo from becoming global metropolis further weaken the economy. First, Japanese financial institutions headquartered in Tokyo are saddled with “worthless domestic and foreign loans” (Meyer, 236), and, second, the stiff competition posed by these foreign firms made it difficult for Tokyo to advance its economic agenda.
The burst of the bubble economy
The bubble economy (comprises by three sectors: corporations, institution, and households) which had been the engine of tremendous growth during the early 1980s surpassing that of the United States by three fold, and has reflected a growth rate of eighteen percent has brought Japanese investment power abroad. According to Roy Smith, during this time, incredible levels of economic activity occurred with the Nikkei stock average index rose from 6, 569 at the end of 1979 to 38, 916 at the end of 1989 reflecting nearly six fold increase and a compounded growth rate of 18 percent per annum (Smith, p. 224).
However, the first half of 1990 saw the burst of the bubble with the decline of the stock prices by 60 percent. This imposed severe strains on Japanese institution affecting consumer spending as well as business investment which caused the economy to suffer through stagnation for more than ten years. Hiromitsu Ishi noted that there were a number of people in- and outside Japan “who believe that Japan’s era as a world leader is over and that its economy has been substantially weakened, deteriorating in its fundamental and potential capability” (p. 73).
The yen appreciation also posted unfavorable economic climate as it reduced the price competitiveness of Japanese goods relative to those produced by foreign firms (Mochizuki, p. 27). Japan’s economic woes was prolonged further by the weak economic recovery in both the United States and Western Europe “making it difficult for Japan to export its way out of its recession as it had in the past” (Mochizuki, p. 27).
Given these entire economic dilemma, Japan could no longer afford to claim economic supremacy in Asia or to pursue its bid to make Tokyo a global financial center. The country must be able to first resolve its economic miseries and stabilized its troubled economy before they think further about their goal for Tokyo. While this is within their rich, most economic analyst predicts that Japan can achieved economic recovery by 2020. In other words, the current economic situation in Japan does not speak well for their economic goals at present as it calls for the government to initiate strong economic measures that will fix their present dilemma. Japan must first be able to come up with a new economic policy that will ensure stable domestic markets that will mitigate the negative effects of excessive competition and promote their exports (Mochizuki, p. 28). Japan also first need to reshape their economy before pursuing its goal of making Tokyo a global financial center by enhancing the international competitiveness of strategic industrial sectors, and by initiating constant consultations and cooperation between the economic ministries and mainstream corporations to manage market trends both domestically and internationally.
Japan needs to address their economic problems first before they could pursue with their goals. Obviously, the government is not yet ready to such undertaking given the economic debacles they are confronting. The economic vulnerability to the global recession is pulling them down the economic ladder and they needed to first step up that ladder before they can start building new objectives.
Nevertheless, given their huge dollar reserves, and a wide pool of economic talent, their objectives are within their reach, and they just needed to come up with a better economic policy that will guide their efforts. They have already proven their capacity and it will not be difficult for them to achieve such goal. However, apparently they are not capable of achieving their goal at present as they needed to focus their efforts in rebuilding their economy. Nonetheless, despite of their economic vulnerability, Japan continues to be an economic power not only in Asia but in the global economic arena.
Ishi, Hiromitsu Making Fiscal Policy in Japan USA: Oxford University Press, 2000.
Makino, Catherine “Economy-Japan: Hurting From Global Recession” 17 October, 2008
Meyer, David R. Hong Kong as a Global Metropolis UK: Cambridge University Press
Mochizuki, Mike M. Japan Domestic Change and Foreign Policy USA: Rand Corporation, 1995.
PricewaterhouseCoopers, “UK Economic Outlook”, PricewaterhouseCoopers, March 2007, http://www.ukmediacentre.pwc.com/imagelibrary/downloadMedia.asp?MediaDetailsID=863
Shaw, Chris Tankan Suggest Japan in Recession
Smith, Roy C. Comeback: The Restoration of American Banking Power in the New World Economy USA: Harvard Business Press, 1994