By Jason Clenfield
Nov. 18 (Bloomberg) -- Japan's newly declared recession may be a chance to show that the world's second-largest economy can finally outperform the U.S. and Europe.
As the West faces the worst financial crisis since the Great Depression, Japan will contract at a fraction of the pace of its major counterparts next year, according to the Organization for Economic Cooperation and Development.
Almost two decades of sub-par growth and an aversion to business and consumer debt have produced a leaner economy. The country's banks are cash-rich and still able to lend, exporting manufacturers such as Toyota Motor Corp. have increased their efficiency and households have a mountain of savings that should buoy spending during the downturn.
``The economy, corporations and households have been through a process of restructuring,'' said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo. ``Japan doesn't have to recalibrate its economy as much as the others because it wasn't flying that high.''
In 2009, Japan's gross domestic product will fall 0.1 percent, compared with shrinkage of 0.9 percent in the U.S. and 0.5 percent in the euro countries, according to the OECD. There was no comparable forecast for the U.K., where the Confederation of British Industry predicts a 1.7 percent drop in GDP.
GDP shrank 0.1 percent in the quarter ending Sept. 30 from the previous period, the Cabinet Office said yesterday. That compares with a 0.2 contraction in the 15-nation euro region and a bit less than 0.1 percent in the U.S.
No Beauty Contest
``It's no longer a beauty contest, you're just picking the least ugly one,'' said Jesper Koll, chief executive officer at Tokyo-based hedge fund TRJ Tantallon Research Japan. ``Japan has a cyclical recession. America may have a structural one.''
Japan's relative health stems from its past bad times. After a boom 20 years ago that saw Japanese companies buy such prizes as New York's Rockefeller Center, the Nikkei 225 Stock Index lost 67 percent of its value in nine years, land prices halved and bad loans pushed banks to the edge of collapse.
The country suffered a decade-long malaise that prompted books like 2001's ``Can Japan Compete?'' It also pushed companies to pay down debt and restrain investment and hiring.
Now, a key central bank index measuring surplus production capacity stood at 2 in September, compared with a 12-year high of 33 in March 2002.
Almost a quarter of all companies listed on the Tokyo Stock Exchange are debt-free compared with 6 percent a decade ago. Among the unencumbered: game-maker Nintendo Co. and Takeda Pharmaceutical Co., Japan's biggest drugmaker.
Deposits Over Loans
Japan's banks have deposits that exceed the value of their loans by a third. Busy repairing their balance sheets after bank and brokerage failures in the late 1990s, lenders also stayed clear of the risky investments that decimated Wall Street.
Subprime-related losses at Japan's banks add up to $15.5 billion, just more than half those booked by Charlotte, North Carolina-based Bank of America Corp. alone -- and only about 2 percent of the world total, according to Bloomberg data.
``The banks didn't globalize. It was kind of a lucky play for them, but everything is relative,'' says Hirotaka Takeuchi, a professor of business at Tokyo's Hitotsubashi University and co-author of ``Can Japan Compete?'' ``They may come out ahead of the game as a result. It's a `tortoise and the hare' type of thing.''
Buying Abroad
The comparative strength of the country's lenders has put them in a position to buy stakes in U.S. and European rivals on the cheap. Mitsubishi UFJ Financial Group Inc. bought 21 percent of Morgan Stanley in October after its value slid by a quarter following the collapse of Lehman Brothers Holdings Inc.
To be sure, the banks have been hit by the Nikkei's 24 percent plunge since October. Losses on stock investments have forced Mitsubishi UFJ and Mizuho Financial Group Inc., the country's top two banks, to sell shares in order to replenish capital.
The value of foreign takeovers by Japanese companies has more than tripled so far this year as prices plummeted and the yen gained, according to Bloomberg data. Takeda Pharmaceutical paid cash for its $8.9 billion purchase of Cambridge, Massachusetts-based Millennium Pharmaceuticals Inc. in April.
While financial firms and pharmaceutical companies are on a buying spree, manufacturers are taking market share away from rivals having a harder time coping with the global slowdown.
Auto Loans
Toyota, the only automaker with an AAA bond rating, is using its creditworthiness to offer no-interest loans to U.S. car buyers. The tactic, which General Motors Corp., Ford Motor Co. and Chrysler LLC have reduced as funding costs rise, helped Toyota increase its share of the U.S. market by 2 percentage points to 18 percent in October from a year earlier, according to Autodata Corp. GM's share shrank by a fifth.
Still, Japan won't escape the global recession. With most of its growth over the past six years generated by exports, the slowdown in the U.S. and Europe is taking a toll.
``Japan's got a fairly straightforward problem: it's experiencing an export-driven recession,'' said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. ``It's nasty, but not particularly complicated. The rest of the world has a financial system disaster on its hands.''
Japan's consumers are another reason the recession may be shallower than elsewhere. A cushion of savings, falling inflation and 2 trillion yen in stimulus from the government mean Japanese households aren't likely to rein in spending like their counterparts in the U.S. Japan's consumption has fallen only once on an annual basis during the last 15 years.
Even after a 10 percent drop in wages since 1997, Japan's households still managed to save about 3 percent of their incomes last year, according to OECD figures. In the U.S., where falling sales sent electronics-retailer Circuit City Stores Inc. into bankruptcy this month, the savings rate is 0.4 percent.
``Japan actually has savings,'' said TRJ Tantallon's Koll. In the U.S., ``What's scary is that Joe Sixpack has no buffer.''
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To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net
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