Veiled in darkness

--the speed and scale of this crisis dwarfens anything happened after 1900. Looking for anything comparable, only the effect of first oil crisis in 1973-1974 outscore it --root causes are the economy is more relying on exports, shares increased from 10% to 16% due to increased demand of cars and electronics --cross-holding of equity shares and Japan accounting allowing the 45% of unrealized gain between market and book value of equity holding as Tier II capital trapped the Japan banks --the coalition government is incapable of rising to the occasion. The oppotosition of finance minister called for resiganition after he slured his words and appeared incoherent in a press conference in G20 meeting in Rome. Feb 16th 2009 TOKYO From Economist.com Dreadful economic results in Japan suggest that things will only get gloomier Shutterstock NO ONE expected good news. Yet Japan’s GDP data for the final three months of last year, published on Monday February 16th, still managed to shock. The preliminary estimate suggested that the economy had shrunk at an annualised rate of 12.7% during the period, the third consecutive quarter of contraction. The speed and scale of the slump leaves behind anything that happened after 1990, when Japan’s bubble burst. Looking for something comparable in Japan’s post-war history, only the effects of the first oil crisis of 1973-74 outscores it—and this slump is far from over. Japan was not at the heart of last autumn’s financial storm, and its banking system is not yet on its knees. Yet the country's economy is being pummelled more than those of the United States or Europe. The problem is Japan’s reliance on manufactured exports, notably cars and consumer electronics. This year Toyota, now the world’s biggest carmaker, is expecting to make its first loss in 70 years. The ten biggest electronics firms expect to lose $20 billion between them. Every week, profit forecasts for corporate Japan are slashed afresh. Export demand drove the longest post-war recovery, in 2002-08, when the country seemed to be putting its post-bubble “lost decade” well behind it. During the recovery, exports’ share of GDP rose by over half, from 10.6% to 16.5%. That strength is now a weakness as consumers around the world have cut their spending and global trade flows have shrunk: in December, for instance, the value of Japan’s exports fell by 35% compared with a year earlier, after falling by 27% in November. The export shock, it is now clear, is triggering others. A near vertical fall in Japan’s industrial production in a few short months has swiftly wiped out all the gains from six years of recovery (see chart). Economists reckon that by the end of February industrial output will be back to levels last seen around 1987. As well as cutting output and running down inventories, companies are also savagely cutting capital investment. That is bound to lower expectations about the economy’s longer-term growth prospects. There will be knock-on effects for employment and consumer spending. Although the unemployment rate stands at just 4.4%, compared with a 2002 peak of 5.5%, this only tells part of the story. Overseas migrants and temporary workers are being laid off in droves. Permanent workers, even at big companies such as Nissan and Panasonic that have announced deep job losses, are on relatively surer ground. Yet they are being asked to work fewer hours for smaller pay packets. This, then, is the final shock: consumer confidence is at all-time lows, and prospects for private consumption look bleak. Deutsche Bank in Tokyo predicts a “severe depression”, with the economy shrinking at least until late 2010. Japan’s banks may not have been at the heart of the sub-prime storm, but the financial system faces stress all the same. The swift retreat of foreigners from the Japanese stockmarket last year sent share prices crashing. Lower share prices may start to matter, since banks count their big equity holdings towards capital. Until now, as credit markets have dried up, so commercial banks have increased their lending to firms, helped in part by government guarantees for small and medium-sized businesses. But for lending to continue, the government may need to inject fresh capital into the banks. Lower share prices have baneful effect for companies too. Many of their loans have covenants tied to falls in shareholders’ equity, or to repeated losses. The desire to avoid loans being called in is helping to drive companies to slash dividends and hoard cash. Not all is gloom. Despite a rise in the yen, Japan’s terms of trade have been helped by sharp falls in the price of energy, almost all of which Japan imports. Households are not indebted like those in America and Britain, but rather sit on a pile of savings. Many of the country’s exporters were lean before these shocking few months, and will be leaner still after. The speed with which they could eventually recover might surprise. But for an economy so dependent on exports, it will take a recovery in global demand, and there are no signs of that yet. In the meantime, policymakers struggle to soften the recession’s impact. The Bank of Japan has taken interest rates back down almost to zero. It has announced non-traditional measures such as buying equities to help boost banks’ capital. Yet it appears unable or unwilling to contemplate anything more radical, such as quantitative easing that might drive down the yen. The coalition government led by Taro Aso seems incapable of rising to the occasion. The finance minister, Shoichi Nakagawa, is charged with keeping the global crisis at bay, but the opposition has called for his resignation after he slurred his words and appeared incoherent at a press conference at a meeting of the G20 countries in Rome. He says that he had mixed wine and cold medicine before appearing, but he is known to drink heavily. The economy minister, Kaoru Yosano, a fiscal conservative, now advocates an economic stimulus worth ¥20 trillion ($217 billion) for the fiscal year that begins in April. That makes sense, if properly spent. Yet Mr Aso is struggling to pass smaller stimulus measures that are already in trouble in a divided Diet (parliament). Not that the opposition Democratic Party of Japan has to do much. The Liberal Democratic Party of Japan that has ruled for nearly all of the past half a century is on the brink of civil war, with Mr Aso’s standing getting weaker by the day. A general election must be called by September. For now, Japan’s economic crisis may have to wait until the political order is overturned, and something more robust put in its place. That may take months, if not years.