Where is the growth story in Asia?
According to Mickey Levy, chief economist of Bank of America, the place to look is Japan.
“When I look at all the Asian nations, the real surprise is unfolding in Japan,” says Levy. “Japan is going to significantly exceed expectations in economic growth - maybe by a surprising amount.”
What is his definition of a surprising amount? Why, he asks, is not feasible to see as much as 2.5% GDP growth for Japan in 2006?
Can that be?
“Everything is relative not only to expectations, but to potential growth," he comments. "Most people think of potential growth of about 1.5%. But since 1991, average-annualized growth has been 1%, and so my question is, ‘Following sustained under-performance but significant restructuring and monetary stimulus, why can’t Japan grow much faster than the potential for several years?’
"Based on prior disappointments, I understand the cautious outlook by policy makers and others. I expect they will change their tune as further news of improvement unfolds."
Of course policy makers often reflect national sentiments. And Japan’s policy makers are not alone in their cautious outlook. A recent Japanese central bank survey showed that 73% of those questioned thought the economy would be unchanged in a year’s time.
And 58% of those surveyed did not expect pay rises in the next year, which has prompted them to say they do not plan on increasing spending.
But despite the man-on-the-street’s view, Levy is not alone in seeing positive signs oJapan’s horizon. As he points out, “There’s been major restructuring -- recapitalization of the banking system, a lot of corporate restructuring.”
Other plusses: “You see it in base wages and bonus schedules that are starting to improve.”
Jim Walker, chief economist at CLSA, also claims there is a “glimmers of hope” in Japan. Positives he points out: The property market is stabilizing and corporate profitability/cash flow is improving while bank lending is turning around at last, albeit slowly. Still, CLSA’s forecast for Japan’s 2006 GDP growth remains a mere 0.9%.
Levy is not as concerned as analysts such as Walker who see a damper effect from faltering Chinese demand for machinery and capital equipment, noting that this will affect Japan’s export growth.
“Over the last year, you see quite a significant slowdown in exports, particularly to China, and yet domestic demand is starting to pick up, so that’s a change in the landscape,” says Levy.
Yet, Japanese-Chinese exports do play a role in the economy, concedes Levy. So what about those Japanese-Chinese political sensitivities that add a dimension of stress?
“No question, there are diplomatic issues,” says Levy. “But there’s tremendous economic trade and that will continue and in fact, add stability and help smooth these edges."
He argues that the headlines do not impact business as usual.
Then how about domestic politics? Prime Minister Junichiro Koizumi’s ruling Liberal Democratic Party posted its biggest election victory in 15 years on September 11, which arguably is not a positive sign given the party’s historic ability to fumble economic recoveries. Remember when they raised taxes in the late 1990s – and stopped dead what analysts then were predicting to be its rebound? And don’t forget that they did a repeat performance about four years ago when politicians tightened fiscal policy.
But Levy views the recent landslide election victory as a positive, noting that even if the privatization of the postal system – part of a reform effort Koizumi is trying to push through - is delayed, the psychological positives of a strong endorsement will be significant.
Levy’s conclusion: “What you’re going to see is increased capital flows into Japan seeking higher rates of return, so my outlook for Japan is positive and well-above expectations both by the private sector and government officials.”
