Commentary by William Pesek
Dec. 15 (Bloomberg) -- First came the “Sony Shock.”
No, not news last week that the consumer-electronics giant is cutting 16,000 jobs -- the other shock. For investors, the big one came in April 2003, when shares fell 27 percent in two days.
Sony Corp.’s woes may pale in comparison with the still developing ones at Toyota Motor Corp. A “Toyota Shock” may be on the way as the dollar trades around 90 yen and questions abound about a U.S. bailout for Detroit automakers.
The difference this time is that the tough 2009 facing Toyota will be shared by Japan’s $4.4 trillion economy. It’s anything but pretty.
Those who argue Japan is better positioned than peers to weather the global crisis have a point. Japan’s roughly $15 trillion of household savings offers a cushion the U.S., Europe and China lack. Japan also has demonstrated a remarkable ability to live without much growth.
Yet the yen’s powerful rally is knocking down one of the three pillars supporting the country, the others being ultra-low interest rates and super-loose fiscal policy. Its gains fly in the face of conditions in an economy that shrank at an annual 1.8 percent pace in the three months ended Sept. 30. That’s where the world’s second-biggest economy finds itself.
Rising and Falling
It’s often said that Japan is a nation of first-rate companies and third-rate politicians. The trouble is, corporate Japan is more reliant on weak exchange rates than the government admits. Germany’s manufacturers often thrive regardless of the euro’s value; Japan’s often rise and fall with the yen.
The problem for companies such as Toyota, Sony and Canon Inc. runs deeper. They are facing the additional obstacle of sinking confidence. Consumers are now the most pessimistic in at least 26 years. Japan’s confidence index dropped to 28.4 last month from 29.4 in October.
Prime Minister Taro Aso’s popularity is declining as fast as the Nikkei 225 Stock Average. His support rate dropped by almost half to 20.9 percent in a Yomiuri newspaper poll published last week, from 40.5 percent a month ago.
Aso’s falling fortunes are getting round-the-clock news coverage, reminding voters the nation is becoming rudderless at the worst time possible. It’s remarkable how quickly Japan has gone from believing it was immune from the U.S.’s woes to staving off a domestic crisis of its own.
‘Falling Apart’
“We need to implement policies to prevent the economy from falling apart,” Economic and Fiscal Policy Minister Kaoru Yosano told reporters on Dec. 9. “It’s going to be a tough year for the economy next year.”
It will get even tougher as the yen bears the brunt of investors’ fleeing risky assets. It is already at a 13-year high against the dollar. While governments in Jakarta and Seoul grapple with plunging currencies, Japanese policy makers are at a loss over how to stop the yen from approaching its postwar high of about 79 to the dollar.
What can Japan really do here? The Bank of Japan is far more likely to cut its benchmark interest rate to zero from 0.3 percent than raise it. The Finance Ministry can sell yen, yet the risk of failure may be too great. If Japan intervened and markets shrugged, the yen’s surge could accelerate.
That’s when newspaper headlines will be dominated by phrases such as “Deflation Is Back” and “Recession Deepens,” further hurting confidence at home. Abroad, a key market for Japanese cars and electronics is in even greater disarray following the U.S. Senate’s rejection of a $14 billion rescue for automakers.
U.S. Disarray
Even if the Bush administration moves to tap a bank-bailout fund to help automakers, it’s not clear Detroit would get as much money as it needs to avoid massive job losses.
If not for the millions of U.S. jobs hanging in the balance, the potential demise of General Motors Corp. or Chrysler LLC might suit Toyota, Honda Motor Co. and Nissan Motor Co. just fine. Not so when the nation in which they traditionally earn more than half of their operating profit is sliding.
The U.S.’s problems are taking their toll Asia-wide. The MSCI Asia Pacific Index lost 3.7 percent on Dec. 12. Australia unveiled plans to spend an extra A$4.7 billion ($3.2 billion) on infrastructure to prevent a recession. And economists say China’s economic slowdown is worsening.
Governments were depending on China to pick up the slack as the U.S. edged toward recession. Japan thought Chinese demand would be a stabilizing force in the world’s fastest-growing economic region. We can forget that.
The question is what will happen if the yen continues to strengthen, which is likely. The yen seems to win demand either way, whether it’s from investors fleeing risky assets, or the falling dollar. A move toward 85 yen can’t be ruled out.
That isn’t good news for Toyota or the rest of corporate Japan. Investors may have to get used to being shocked.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net
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