With Secretary of State Hillary Rodham Clinton beginning a tour of Asia this week in Tokyo, Japan’s economy is suffering from its worst downturn in 35 years, and its prime minister is hanging by his nails to keep his job.
Japan’s economy, the second-largest in the world after that of the United States, shrank at an annual rate of 12.7% in the final three months of last year, the government said Monday. It was the biggest contraction since a surge in worldwide oil prices precipitated an economic crisis in 1974.
Japan’s prime minister, Taro Aso, had said just last week that “our wounds are shallow” compared with the economic pain in other countries.
But the fourth-quarter report showed Japan’s economic output plunging much more steeply than that of the U.S. or the European Union -- and analysts say the trouble is likely to intensify.
“I think the overall situation will continue into the third and fourth quarter this year,” said Masaru Hamasaki, a strategist at Toyota Asset Management in Tokyo. “And even if there is a recovery, it will probably be weak.”
The main reason: Like China, South Korea and Taiwan, Japan has relied heavily on exports, especially to the U.S., to drive economic growth. When the credit crunch sapped the American economy and consumers pulled back last year, Asia’s exports collapsed.
Exacerbating matters for Japan has been an increase in the value of the yen, which has tended to make Japanese goods more expensive in foreign markets.
In December, Japan’s total exports fell at the sharpest pace on record, and its exports to the U.S., Europe and the rest of Asia each plummeted more than 35% from a year earlier.
The data confirmed a spate of grim news in recent weeks from Japan’s biggest companies, including Toyota Motor Corp.'s first operating loss in 70 years and layoffs of tens of thousands of workers by NEC Corp., Nissan Motor Co., Sony Corp., Toshiba Corp. and others.
Even before those job cuts, Japan’s unemployment rate jumped to 4.4% in December from 3.9% in November, mainly because of staff reductions at small and medium-size businesses as well as the elimination of many temporary jobs.
But slumping exports aren’t the only factor to blame. With inflation’s return to Japan last year after a long absence, real wages have declined. As a result, even though Japanese consumers have reduced their famously high rate of savings, they trimmed their spending for three straight quarters. That’s something that didn’t happen even during the “lost decade” of the 1990s, when the economy collapsed after a property-and-stock bubble burst.
“The problem isn’t that consumers aren’t loosening up, but [it’s that] they don’t have money,” said Richard Katz, editor of the Oriental Economist Report, a New York-based newsletter focusing on Japan and U.S.-Japan relations.
Whether Japan is looking at another long, protracted period of economic malaise will depend largely on when the U.S. gets back on its feet. Analysts also see Japan’s future now more than ever riding on China, which too is reeling from sagging global demand.
For its part, Japan can take some comfort in that its banks are in better shape than they were during the 1990s -- and in better shape than many of their U.S. counterparts, which are suffering from a housing-related financial crisis.
“This time [Japan’s] financial system is quite stable,” said John Vail, chief global strategist at Nikko Asset Management in Tokyo.
But the nation’s political system is as deadlocked as ever, making it tough to push through the kind of large fiscal stimulus plans adopted by China and the U.S. The latest economic data could put more pressure on Japan’s prime minister, Aso, and his ruling Liberal Democratic Party to add to two stimulus packages announced last year totaling about $70 billion.
The prime minister’s public-support ratings have fallen below 10%, Japanese television reported over the weekend. That could prompt the opposition to press for Aso’s removal before elections this fall.
In her first stop in Asia as President Obama’s chief diplomat, Clinton is expected to talk with America’s longtime ally on a variety of issues, including climate change and regional security, particularly tensions on the Korean peninsula.
The global economic crisis is certain to be high on the agenda as well, both in Japan and as Clinton moves on to Indonesia, South Korea and China later in the week. One reason, analysts say, is that the economic situation increases the threat of protectionism.
“The most important thing each nation can promise the other is to stem protectionist policies,” said Mark Zandi, chief economist at Moody’s Economy.com. “If protectionist sentiment boils over, it will undermine the global economy further.”
Zandi added that the U.S. could also signal that it would not object if the Japanese were to pursue policies to weaken the yen, which has gained 18% in value against the dollar since August.
Clinton touched on the economy today, her first full day in Tokyo, in remarks before 200 U.S. diplomats and their families at the U.S. embassy, Reuters reported.
“These are hard times economically for the Japanese people, just as it is in many places around the world,” she said. “I am absolutely confident we will navigate our way through these difficulties.”
Most analysts don’t think Japan is looking at another lost decade. But with its reliance on exports and perpetually weak domestic demand, the country’s fate lies in large part with others.
“In many ways,” Katz said, “it’s not in Japan’s hands.”