prpri Convoluted Turbulenlence of Japan Convoluted Turbulenlence of Japan

Japan’s second quarter GDP increased by 4.8% in 2009 from a year ago. This was surprising for most economists as the predicated a 2.7% growth. The figure is very much reliable as the GDP number came riding not only at the cost of export buts also domestic demand contributed too. Consumption of goods has increased in Japan along with investments growth in manufacturing and capital goods and other sectors excluding residential projects.

4.8%GDP growth came from the following:

Domestic demand gained 3.3% from a year ago and private demand jumped 4.2% in the period.

  • The report notes that private consumption advanced 2.8%, while consumption of households increased 2.9%.
  • Private residential investment declined 27.5% and private non-residential investments soared 6.6%.
    But there is a mismatch of data which is well highlighted.
  • Japan’s exports fell 23.2% in October from a year earlier.
  • Exports to Asia, which now account for more than half of Japan’s total exports, fell 15.0% from a year earlier.

The below chart shows the Export and Import figures comparison for October 2008 to October 2009

October 2009 October 2008 Percent Change
Exports 5,308,867 6,914,811 -23.2
Imports 4,501,781 6,990,025 -35.6
Balance 807,086 75,214

So when export is down and even the export to Asian economies which constitutes 50% of Japan’s exports then from where one gets an economic growth of 4.8% based on domestic consumption growth of 3.3% and private demand of 4.2%.It well hard to find the growth ladder steps climbed by GDP in real terms when the spikes of ladder are missing. We only hope that in the coming days we will get more realistic picture of the Japan economic growth.

Japan has another problem which might become a big threat to other Asian economies. We are always concerned about rising fiscal deficit of US and Europe but we never noticed the rising bubble just besides our next door. Gross public debt mushroomed during years of stimulus spending on expensive dams and roads, and this year it passed 187% of Japan’s economy.

Yes Japan has a fiscal deficit of 187% of its GDP. That debt could soon reach twice the size of the US$5 trillion (RM17 trillion) economy — by far the highest debt-to-GDP ratio in recent times— and the biggest, in real terms, the world has seen. Japan’s outstanding debt is as big as the economies of Britain, France and Germany combined.

  • for reducing this deficit Japan for the first time since the chaos of World War II, Japan will issue more new government bonds than it will receive in tax receipts.
  • Japan will keep on selling more bonds this year and next to reduce the bubble of debt.
  • Japan got into such deep debt is a tale of reckless spending. The country poured hundreds of billions of dollars into civil engineering projects in the postwar era, riddling Japan with highways, dams and state-of-the-art ports.
  • They also provided like cash support for families with children and free high schools — could ultimately widen budget deficits at a time when tax revenue continues to plunge in the aftermath of the global financial crisis.

Japan has also failed to build up its reserves. The yen made up 3.08 %of foreign currency reserves in mid-2009, down from 3.29% a year earlier and down from 6.4% in 1999. In mid-2009, the dollar accounted for almost 63% of global foreign reserves.

In the coming days we will get yen valuation just simply eroding. It is now hitting 14year high but in the coming days it will just have a cascading Journey.

But we also find some hidden treasures within Japanese economy. Japan has made some radical changes in its economic policies which will boost its coming industrial days. We might get the burden of debt falling back and giving new shape to the economy to grow. When we dig into the invisible analysis we find that from 2001 to 2005:

  • For U.S. companies, Japan is an attractive investment destination offering high investment yields. U.S. direct investments in Japan offer the highest yields among the country’s direct investments in major industrialized nations, exceeding the global average including developing countries.
  • Yields from direct investments in Japan are 1.5 to 2 times the yields from E.U. industrialized nations.
  • Direct investment yields of U.S. companies from Japan averaged 13% per annum from 2001 through 2005. This figure not only exceeds the global average of 10%, but it is also the highest among all G7 nations.
  • But among all these the twist in the story line is that Japan’s economic growth rate was not particularly high. On the contrary, it lagged behind other industrialized nations in most of the period. This made the return on Japan investment more lucrative.

The table below lists the U.S. direct investments in six major industrialized nations (G7 member nations other than the U.S.) as well as global average investment yields from the corresponding countries. To absorb yearly variations, five-year averages were used in the comparison. The shaded fields indicate the countries offering the highest yield in each applicable industry.

Even in the recent times Japan changed polices to make its country further lucrative.

The below image shows the rate of US investments in Japan:


In early 2008, the Ministry of Economy, Trade and Industry (METI) proposed two measures to encourage foreign investment by reducing the potential Japanese tax burden on foreigners investing in private equity funds.

  • The first provides an exemption from local tax nexus (that is, treatment as a permanent establishment – PE) for foreign limited partners in certain kinds of Japanese limited partnerships (or “similar” foreign partnerships).
  • The second provides an exception for such partners from the partnership attribution.

All the above two measures were successfully incorporated into the 2009 tax reform, which was passed by the House of Representatives of the Diet on 27 February 2009 and became effective beginning 1 April 2009.

But the most important part to be accentuated is that how Japan will make benefits out of all these measures and investments. Else Japan will just remain an economy to make money and no real growth for the country. This will be cleared in the coming days of Japan economic movements.

Japan is now in the mixed of its journey where it has to try hard more than US to come out of the dark woods of rising fiscal deficit. Since it erodes not only the reserves but makes the economy less competitive. Thats why other economies are taking advantage of Japan economy and making such high yield of returns on its economy.

Authored by: Indranil Sen Gupta , Research Analyst

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August 2021