Canadian Embassy Tokyo en 04 06

7/30/2019 Canadian Embassy Tokyo en 04 06

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Canadian Embassy

TokyoA ril 2006

Can a changing Japan meet theproductivity challenge in the long-run?

Japans Economy Recovered


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Current Outlook and Issues Macroeconomic situation, regional

economies, business, banks and

labour, monetary policy normalisation

Strengths Size, wealth, technology,

manufacturing, Asian integration

Productivity challenge Demographics, LT structural change,

efficiency, bureaucracy Assessment

Is Japans economy recovering?

What does this mean for Canada and

the world?

Overview


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Current macro outlook Regional economies

Business resurgence

Financial sector revival

Labour market upturn

Hot topic: monetarypolicy normalisation

Current trends

and issues


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2.7% growth in 05- After 2.3% in 04

Strong end to 05- 05Q4: 5.4% q/q annualized

- 05Q4: 4% over 04Q406 and 07 forecastquite robust- Consensus of Japanese

forecasters (forfiscal year

ending in March):- FY05: 3.4%

- FY06: 2.6%,

- FY07: 2.4%

Note: in 2005, Canadas economy grew2.9%, with much faster population growth.

Economic growth:Real GDP growth strong in 2005

Source: Cabinet Office, Japan

Real GDP y/y %(05 preliminary)

0.4

0.1

1.8

2.3

2.7

0

0.5

1

1.5

2

2.5

3

01 02 03 04 05

Calendar year


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Contributions to y/y real GDP growth % (05preliminary)

1.2

2.1

0.8

1.8

0.7

-0.3

1.1

1.8

2.3

0.6

-0.5

1.1

0.3

-0.3-0.5 -0.5

1.1

0.4

0.5

-0.8

0.7

0.6

0.8

-0.1

-1.9

-0.1

-0.1

0.1

0.9

0.2

-0.2

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

95 96 97 98 99 00 01 02 03 04 05

Calendar year

Final domestic sales Public demand Net Exports

Private andDomesticGrowth stimulus Domestic final

sales (private

cons. & invest. netof inventorychanges) nowgrowth driver

Unlike 90s, publicdemand is weak:sharp cuts in

public worksModest netexport growth:

Economy firingon all cylinders

GDP Growth:More sustainable now

Tech bubble

Source: Cabinet Office, Japan

Real GDP


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NAGOYA: booming manufacturing centre

Recovery by city and region:Boom centered on industrial heartland, urban areas

OSAKA-KYOTO-KOBE:re-emerging second urban region of Japan

Recovering strongly: robust growth overall; very tightlabour market; industry, services, real estate increasingly buoyant

Recovering: firm growth; tightening labour market;industry and services solid

Recovering mildly: growth picking up; labour market,Industry and services recovering, although picture is uneven

Signs of a turnaround: growth remains slow.

Labour market slack remains; modest pickup in some industries

HIROSHIMA:Dynamic regional centre

FUKUOKA:

modern city withgrowing ties to NE Asia

Source: Cabinet Office, Embassy estimations

SAPPORO: Northern centreat heart of agri-food & tourism region

TOKYO-YOKOHAMA: growing financialand economic metropolis; worlds biggest city

with economy larger than Canadas

Stagnant/Recession: no regions in thiscategory at this time


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-3

-2

-1

0

1

2

3

annual

annual

annual

annual

Q3

Q4

Q1

Q2

Q3

Q4

FY00 FY01 FY02 FY03 CY04 CY05

Core CPI CGPI

CSPI GDP Deflator

CPI inflationnow mildly positive

Core CPI 0.5% y/y Jan 06

Corp. goods prices

GDP deflator import prices key factor

BoJ has calledend of deflation:

Quantitative easing over: BoJ now targetting 0%

interest rate

Interest rates will stay at

or near zero this year

BoJ wants CPI at 0-2%

Deflation:Easingending?

Source: Bank of Japan

0

Change in prices (y/y%)


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Business sector recovery

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

1980Jan.*Mar.

1981Jul.*Sep.

1983Jan.*Mar.

1984Jul.*Sep.

1986Jan.*Mar.

1987Jul.*Sep.

1989Jan.*Mar.

1990Jul.*Sep.

1992Jan.*Mar.

1993Jul.*Sep.

1995Jan.*Mar.

1996Jul.*Sep.

1998Jan.*Mar.

1999Jul.*Sep.

2001Jan.*Mar.

2002Jul.*Sep.

2004Jan.*Mar.

2005Jul.*Sep.

Restructuring payingoff, debt bubble gone

Corporate debt/GDP ratio nowbelow 1980 level (HSBC) debt repaid by non-financial

corps: 40% of GDP! Liab. / bal.sheet ratio lowest in50 yrs. (Morgan Stanley)

Non-financial firms maybe in best shape ever

Profitability at 50-year highs Q405: 14th consecutive Qtr. ofy/y profit growth Longest period since 1960s

Confidence, return on equity atpost-bubble high

Non-financial firm profitability(current profit/sales - 4Q moving average)

Property bubble

IT Bubble

Source: Ministry of Finance


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Banking sector revival

Non-perfoming Loans (NPLs) at major banks

5.7%

8.7%

7.1%

5.1%

2.9%2.4%

0

5

10

15

20

25

30

35

End

FY00

FY01 FY02 FY03 FY04 FY05H1

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Total NPLs -- trillions of yen -- left scaleNPLs as percentage of total

Source: Bank of Japan

NPL problem fixed

Takenaka plan to halve2001 NPLs by 2004exceeded

Capital adequacy, qualityimproved

Banks repaying pub. funds

Profit recovery isless certain

FY05H1 saw highest profitson record, but spreads tightand loan growth slow

Key: fee-based financialservices

Rising interest rates will

help bank profits


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Labour market upturnRecovery may finally be spreading to the labour market

Restructuring = job cuts Aging-driven labour force decline

excess labour throughout 1990s

Full-time jobs up again

Growth had been in part-timejobs, full-time jobs were falling.This trend has reversed.

Latest unemployment rate: 4.1% Offers/applicant ration 1:1!

Firms now perceive labour

shortage

Rising incomes key torecovery, deflation end Nominal employee compensation

rose 2.6% in 05Q4 over 04Q4Source: Bank of Japan


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Hot topic: monetary policyWhat will the impact be of normalisation, rising i-rates?

overall in Japan Household (HH) assets = 4X HH debts consumption boost offsets profit impact; banks benefit from better spreads

BUT: govt has to pay higher interest; book value of bondholdings fall,overseas assets may suffer, possibly gold

1: Source: Nomura securities

Interest

rates

increase

1%

2: Source: Goldman Sachs

Govt

interest

expense

rises over

time as debt

rolled over

(JGBs

= 150%

Of GDP,

Held 95%

In Japan)

but, govtspending rises

Book value

of JGB

holdings

falls

Overseas

Assets

Suffer as

carry trade

abates

and JGBs, overseasassets fall.

Households gain

Y7.8 trillion2

Cons. spending

Rises 0.8%1

Modest rise in

profits2

Loan spreads

improve

Households, firms,banks benefit

What if ratesincrease?


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Size, wealth

manufacturing productivity

technology

Asias rise and economic integration

Japans strengths


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KANTO

TOKAI

KANSAI

Size and wealth:2nd biggest economy; biggest net creditor

Japans GDP: larger than rest of Asia

equal to the combinedeconomy of all US stateswest of the Mississippi

(Tokyo Metro Region)

(Osaka-Kobe-Kyoto Region)

(Nagoya-Shizuoka Region)

= GDP larger than Chinas, twice Canadas

= GDP larger than Indias or Brazils

= GDP larger than Mexicos or Koreas

Kanto+Tokai

GDP larger than Germanys but Tokyo-Nagoya distance is less

than Montreal-Toronto

Despite govt debt,net foreign position

was CAN$ 2.2 trillion

(What Japan is owed)(what Japan owes) =(Canadas annual GDP X 2)

Individual financial assets in Japan= $CAN 17 trillion (280% ofGDP)

= 4 times household liabilities


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Strengths:Manufacturing productivity, leading industries

Leader in manufacturing productivity Japanese manufacturing productivity is 20% higher than in US

This partly explains Japans trade surplus with the world.

Growing lead in key industrial sectors E.g: PAX TOYOTA: it can be argued that Japanese automotive

empires are dictating terms of global auto industry Result is growing prosperity in the imperial capitals, the Japanese

design and manufacturing centres (eg: Nagoya)

Leadership brings obligation to maintain peace, avoid trade friction

Strong investment in key markets, notably NAFTA

Some restraint in pricing strategy to avoid crippling US cos

Strong leadership in others sectors: Japan HQs global financeand tech hubs, from chemicals to electronics


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Strengths:Technology and R&D

Japan is R&D leader

Highest R&D/GDP ratio in G7(over 3% in 2001)

Canada 3rd lowest in 2001 (


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Japanese exports (1990=100)

50

100

150

200

250

300

350

400

1990 9

2 94 96 98

2000 0

2

total US + EU

east asia china*

Strengths:Japan a player in Asias rise and integration

Japan key to Asia growth pole On the surface, US+EU becoming less

important in Japans trade

Japanese aid and FDI historically topsource in many Asian countries

China, ASEAN processJapans exports to US, EU; alsoproducts for Japanese market

Asia buys Japans tech. and capital Japan trade surplus with China, Korea

Japans firms drive processing trade Dynamic means US growth still hastwice impact on Japan as Chinas Chinese export growth key to Japan

Will Japans firms reach thenew Asian consumer? Source: Ministry of Finance, Japan


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Population decline Productivity acceleration? Long-term structural change

Capital allocation improvements Remaining policy challenges Decline or opportunity?

Japans

productivitychallenge

Photos: Nikkei Weekly


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Population declineThe demographic imperative for faster productivity growth

Source: Ministry of Internal affairs and communications

Japans population isnow falling:

2005 saw first slight

overall pop. declineBy 2050: Down to 100M

30 million lesspeople of workingage (15-64)

10M more peopleage 65 and over

Total Population (thousands)

100,593

83,200

2005

=127,757

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1950

1960

1970

1980

1990

2000

2010f

2020f

2030f

2040f

2050f


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Productivity acceleration?Is the increase structural or temporary after slowdown?

Source: Cabinet Office

GDP/hour y/y growthslowed after bubble

GDP/hour y/y growthslower in 94-03 vs.

85-93 (OECD)Has productivity growthpicked up again?

GDP/hour y/y growthwas well above trendin 2005

Key question: is Japandifferent than during post-bubble period in astructural way?

GDP/hour worked y/y%

3.40%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Embassy Calculation based on Cabinet Office andMinistry of Labour data


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Long-term changeDespite stagnation -- major structural shifts occurred

0%

20%

40%

60%

80%

100%

1990 1994 1998 2002

TERTIARY

SECONDARY

PRIMARYSource: Cabinet Office

Like in all advancedeconomies, thetertiary (services)

sectors share isgrowing: The share of services in

GDP increased 10%between 1990 and 2002

The share ofmanufacturing has fallenby 9% of GDP


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Increased openness to tradeJapanese markets are becoming more contestable


Share of trade ineconomy is growing:

Asian integration:growing two-waytrade with Chinaand other Asianeconomies

Long term may see atrade deficit

Recovery and

aging: savingsdown, cons. up

current acct willstay positive:foreign inv. income

14.76%

9.47%13.35%

7.10%

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0.00%

2.00%

4.00%

6.00%8.00%

10.00%

12.00%

14.00%

16.00%

Trade balance/GDP Exports/GDP Imports/GDP


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Capital allocation improvingBig problem in 1990s was poor allocation of capital


Overall, Japan isinvesting less as ashare of GDP:

Less total investment

Significant decrease in

public investmentTrend suggests I/GDPratio is edging up:

Due entirely to stronggrowth in private

investment Firms increasing their

capital, productivity, tomeet growing demand,face labour shortages

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Fixed capital formation/GDPPublic Investment/GDPPrivate capital formation/GDP


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Areas for further improvement:Capital market, services, agriculture

Capital marketefficiency is improving

Households: 50% in cash; butinterest in risk assets is rising

Corp. fin was too bank-led Now: Cos borrowing less,issuing more stock, bonds

Lending down from peak (-20%), but may be on riseagain: syndicated loan boom

Corp. control more market-

driven, arms-length investorsnow lead M&A, private equity booming Efficiency was postal reform

key motive

Services need further reform

lag US productivity up to 40%

Competition weak, but reformsprogressing: prices falling (e.g:

utilities) OECD: Japan ahead onprivatization, limiting financialinterventionism, lags in dereg

Agriculture too protected

Protection among highest in OECD Govt too slow to reform ag.

BUT, ag trade opportunities mayspur new openness (eg: apples)


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Government:Debt, deficit and bureaucratic inefficiency

Rising debt, large deficit 95% of debt held in Japan

Deficit 5-6% of GDP balance not likely until 2010s

Taxes among lowest in OECD

Aggressive cuts are risky At odds with anti-deflation drive

Govt small, but inefficient Red tape barrier to growth:

privatization accomplished, but

deregulation a work in progress Reform: better govt, not smaller

public works cuts, govt FI reform

Rising social security costs: govt will get bigger (G/GDP)Source: IMF

Net public debt (% of GDP)

0

10

20

30

40

50

60

70

80

90

100

1999 2000 2001 2002 2003 2004 2005f 2006f

Canada Japan


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Aging and population decline:Demographic challenge or opportunity?

Aging or greying a milestone of social progress

Older people living longer healthier lives Japan asking what is place/role of elders beyond dependency?

Low birthrate (1.29) challenge, but also opportunity

Challenge: women not participating fully in paid economy Men: participation rate highest in OECD; women: among the lowest

Can demog. decline mitigate social costs that plague Japan? crowding, env. pressure, resource dependence

Key policy priority: reform to boost output, taxes per worker social security costs will double in the next 20 years

Capital reallocation + tech can increase productivity (labour,TFP)

Demog. decline does not mean lower living standard per capita GDP growth > GDP growth (eg: GDP 2%; pop0.5%)


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Are Japans economic woes over?

What is the long-term future of Japans economy? What does this mean for Canada and the world?

Assessment


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Are Japans economic woes over?What is Japans long-term economic future?

Japan recovered, resilient, but LT challenges remain Shift from export-led growth to domestic demand well underway

Last short-term challenge is to normalize monetary policy

Falling population and fiscal constraint means Japan needs to boost itsproductivity growth again: the reform imperative remains

Sudden change not Japanese way, but Japan is evolvingat an accelerating pace China factor, Asian integration: Asia is Japans new strategic focus

Demographic change and new generation with different values

Stronger private sector, a government forced to change by finances,households taking risks once again

The future will not be like the past If handled right, the Japan that evolves will be fundamentally stronger

than the bubble economy that was so feared in the 80s; Japanese firmsmay already be in the best financial shape ever


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Short-term outlook: main risks

Downside: Global economy, the US dollar and globalimbalances, higher oil prices

Chinese economy stumbles hard and cuts off export growth

US looks good, but housing bubble bursting is a risk

US dollar fall would cause rapid yen rise and slow exports Japan is energy efficient, so direct effect of high oil is

lessened, but may slow growth in key export markets

Upside: stronger than expected consumer revival,productivity growth

Labour market tighter; companies are increasing bonuses,dividends and starting raise wages

Domestic demand may continue to surprise to the upside

Improved capital allocation, labour shortages: more productiveinvestment and rising productivity is possible

A t


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Japan is contributing to global growth again The worlds second largest economy is integral part of Asian

growth pole, and imports are gaining as a share of GDP

Emerging Japan-US-China economic triangle

Imbalance or a deepening of global integration?

Japan a big market, but is increasingly hub of investment and tech.

How does Canada plug in to the network?

Japanese government must change its relationship

with its people, but also with the world:

less aid, more trade applying both at home and abroad

Chequebook politics and diplomacy too expensive now: Japan willseek influence through other means

AssessmentWhat does this mean for the world?

A t


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Opportunities for trade in traditional & emerging sectors Resources, housing, agriculture

Innovation and science partner: IT, environmental technologies,nanotechnology, robotics, biotechnology, pharmaceuticals

Investment partner

Prospects for new partnerships in technology, services andinvestment, key areas of future growth

Demographics mean significantchange in consumptionpatterns,new opportunities particularly in services

Canadian companies can take advantage ofJapans central placein the booming Asian economy We must see Japan as Asias financial and tech hub, very much

complementary to Asian high growth economies.

New International Policy Statement recognizes this.

AssessmentWhat does this mean for Canada?

The Canadian Embassy in Tokyo Japan


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The Canadian Embassy in Tokyo, Japan

7-3-38 Akasaka, Minato-ku, Tokyo 107-8503

Tel: (81) 3 5412-6200 Web: http://www.dfait-maeci.gc.ca/ni-kaContact:Laurence BlandfordFirst Secretary, Finance and EconomyEmail: [email protected]

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Canadian Embassy Tokyo en 04 06