Effects of Economic crisis on Tokyo - Essay Example

Download the original attachment TokyotoEffects of Economic crisis on Tokyo “We’re in a very bad way at the moment and things are getting worse.  Tokyo is no longer in a recession — it’s in a depression.” James Malcolm, senior economist at JP Morgan Securities (Asia) Introduction The world today is going through recession, and just as everything else is going global, so is the recession. A number of big-economies and states have readily declared recession officially, while an even bigger number is trying to fight it out, however, unofficially, they are under recession as well. The phenomenon is not just restricted to the west where UK has declared official recession but stands valid for other parts of the world as well, where economies as strong as Japan have declared official recession. Japan is rightly considered the second largest economy in the world, existing today, or just before the recessionary scenario. The Forecast of a Recession Following the 9/11 incident and the occurrence of ‘mad cow disease’, economists were forecasting the commencement of an intense recession in Japan. Another major reason underlying this strong forecast was the global economic downturn. Recently released surveys of future trends together with economic data recording economic performance over recent months point at least to the onset of Japan’s fourth official recession — defined as two consecutive quarters of negative growth— in the space of a decade.  Japan was last in recession in the first half of 1998 following the collapse of major financial institutions.  The current downturn will be deeper, with private investment drying up amid slack global demand and bad loans weighing down the domestic economy, say analysts. This news implicates that the world’s three biggest economies — the US, Japan and Germany — are all now in, or on the verge of, recession for the first time since the 1970s. The Present Scenario One important indicator of the bleak outlook for the Japanese economy was the Bank of Japan’s Tankan survey.  The Tankan’s quarterly diffusion index, which measures the percentage of major manufacturers reporting an expansion of business activity as opposed to the percentage that expect a decrease, fell to minus 33 for the September quarter compared to minus 16 for the previous three months.  The index is now at its worst level since the April-June 1999 survey, when the figure fell to minus 37. The recession didn’t make a huge impact on the major cities; however, as expected, Tokyo took the hardest hit of these financial crises. About Tokyo Tokyo is not just the financial centre of the Japanese economy but also that of East Asia, and one of the three ‘command centers’ in the world of finance, alongside New York City and London. Tokyo stands in the world today as the largest metropolitan economy. In accordance with a study conducted by PricewaterhouseCoopers, the total urban area of the city stands at 35.2 million people, with a GDP of over USD 1,100 as per the statistics of the year 2006; these figures made it the largest urban agglomeration GDP in the world. Tokyo’s economic strength is also visible from the fact that amongst the Global-500 companies, 50 are based in the Japanese capital, compared to the second ranked city that contains only 25 (PricewaterhouseCoopers, 2007). Tokyo is not only a big international financial centre, but is also the operating hub of a number of large scale investment banks, insurance companies, etc. (The Economist, 2007). For 14 years in a row till 2006, the capital was ranked as the most expensive city in the world by Economist Intelligence Unit (EIU). Tokyo Stock Exchange is also considered the largest in the region, second largest in the world based on the marker capitalization, and the fourth largest based on the average shares turnover. The Hit on Tokyo This section illustrates some important statistics pertinent to the hit on the Tokyo economy in the present recession-cum-depression scenario: Reduced Spending: At present, the unemployment in Tokyo has reached its highest levels, with the Consumer Confidence Index (CCI) and the Producer Confidence Index (PCI) falling rapidly. This has caused a drastic cut in average spending in the region; the average house hold spending has declined by 0.8% in the month of August, depicting the fifth straight month of year-on-year declines.  Consumer prices, which have been in decline continuously for the last 23 months, were down 0.9 percent in August from a year earlier (Haynes, 2006). Unemployment: The official unemployment has risen to 5.5% with predictions that it will rise further in near future; this 5.5% is the highest levels in the post-war period.  Tetsuro Sugiura, chief economist for Fuji Research Institute of Tokyo (FRIT), has predicted that unemployment will rise to the levels of 6% in coming months. FRIT reported that the number of jobs lost through forced layoffs and bankruptcies jumped for the first time in three months, rising by 80,000 from the August figure.  The Japanese Ministry of Health, Labor and Welfare announced that people claiming unemployment benefits reached a record 1.167 million in August. Suicide Rate: A report in the Japanese Times on suicide figures in 2007 revealed an increasing number of people committing suicide because of economic reasons such as debt and unemployment.  Although the number of suicides in Japan in 2000 actually fell 3.3 percent to 31,957, the level has been over 30,000 for the third straight year (Yamaguchi, 2008). The report noted that the number of suicides by people who lost their jobs increased by 139 from the previous year to 1,335, while the number of self employed workers taking their own lives rose 86 to 4,366.  Experts warn that the number of suicides in this category could increase further as the nation undergoes the tough economic reforms advocated by former Prime Minister Junichiro Koizumi. The government admits these reforms will lead to more unemployment in the near term. Job Restructuring and Lay offs: The job destruction is continuing as the process of corporate restructuring intensifies.  The latest announcement of job cuts in Tokyo include: Sony Corporation Main Office, which will shed 5,000 jobs through early retirement; Tokyo office of Mizuho, one of Japan’s major private banks, will cut 1,200 jobs or 7 percent of its domestic workforce by the end of 2008; Bank of Tokyo-Mitsubishi UFJ will slash its 8000 workforce by 20 percent. Thousands of jobs are also set to go at the Mycal, one of the Tokyo’s once popular supermarket chains, which recently filed for bankruptcy with almost $15 billion in debts (Conachy, 2008). The Ground Realities – as they ‘seem’ On many of Tokyo’s streets the slowdown is almost invisible. The shops are bustling and the restaurants full. While there are unemployed people in Japan — actually more than during the time of the bubble economy — it is hard to notice them in everyday life. Most people continue to be seen dressed well in public, though there are reports that many have switched from gourmet meals at expensive restaurants to instant noodles in the microwave.  While women may be seen carrying Louis Vuitton bags around and dressed in fashionable clothes, they might use simple track suits to wear at home (CNN City guide, 2007(video)).        There are other less noticeable signs of recession, though. Many empty taxies can be found lining up to pick up passengers outside restaurants or train stations, unprecedented number of sale signs in upscale department stores in Ginza, rising number of discount stores and ¥100 (around $1) shops and less crowded bars and restaurants at dinner time. At lunch time though, the restaurants continue to be fairly crowded for two reasons: the “obasans” continue to socialize and “salary men” have shifted business entertainment from dinner to lunch time.  The Positive thought While expense accounts have been considerably curtailed, companies continue to provide some degree of support to revive their businesses.  Similarly, the Japanese government continues to spend enormous sums on public works project in the hope of reviving the economy. According to a recent article in Bloomberg News entitled “Think Japan’s Economy is Bad Now? Just wait”, the situation will only get worse. “It’s here where things get ugly,” the article states. “As unemployment in Tokyo rises beyond today’s record 5 percent, consumers may spend less.  If already frugal households buy less, corporate profits fall further and so do asset values.  Banks, then, may be forced to let more companies fail, boosting unemployment and reducing corporate profits.  And so on and so on.” This is the very cycle Japan’s policy makers have been dreading for years.  To date, Tokyo has held things together with ultra-low interest rates and aggressive fiscal spending. Now that borrowing costs are at zero percent and Tokyo has papered markets with more bonds than investors can use, that’s no longer possible. Faced with that darkening economic cloud and persistent problems at Japan’s banks, the three main credit rating agencies recently dropped Tokyo’s creditworthiness.  Tokyo is now in a tie with Milan, as the least-likely major industrial city to pay back its debts. The country’s normally conservative Bank of Japan is predicting the contraction will last for two years.  Trade Minister Takeo Hiranuma raised the possibility that the economy may continue to contract in the next fiscal year — which ends in June 2009.  “If the current situation continues, negative growth is inevitable (in the next fiscal year),” he said.        Merrill Lynch Japan chief economist Jesper Koll agrees, saying the economic outlook in Japan will get worse before it gets better: “We expect six consecutive negative quarters,” he told CNN television. Restructuring of the private sector and allowing companies to fall into bankruptcy was the sort of “creative destruction” for Tokyo’s financial sector that eventually will create room for profitable companies to emerge.  But this process will certainly be long and painful, with unemployment likely to go way above 6 percent in the financial center of the country, and Japanese government should be aware of this fact. To help its capital recover from this recession, Japan needs to increase consumer spending in Tokyo. The Business sector of the city have responded to the problems for the first time by massive layoffs and unemployment is now higher than in any city in the United States.  And prices in Japan are actually falling, encouraging consumers to delay spending in the hope that goods will get cheaper in the future. The biggest drag on the economy is consumption, which accounts for about 60 percent of Gross Domestic Product (GDP).  Despite some of the world’s highest levels of savings and falling prices, consumer spending in Tokyo shrank by a worse-than-expected 1.7 percent (Lopez, 2007). Less than eight years after the last financial crisis, several banks are once again teetering on the edge of collapse, deflation has taken a grip and the government is burdened with one of the biggest public debt the world has ever seen.  Government’s Economic Plans – revival strategy It was against this background that the Koizumi government released its first proposals for reviving the economy in 2006.  The reform proposal, the biggest component of which was Tokyo’s recovery plan, was compiled by the newly created Council on Economic and Fiscal Policy. In September current year, the newly assigned Prime Minister Taro Aso, changed the cabinet of the Council, and under his decree a new, more broadened bailout plan was created. Headed by Prime Minister, the new council includes Minister of Economy Toshihiro, Minister of Finance Nakagawa, and Minister of State for Economic and Fiscal Policy Yosano, the Governor of the Bank of Japan, Masaaki Shirakawa, and four big business representatives. The blueprint included a commitment to press ahead with the removal of bad debt from the banking sector within two to three years, sweeping privatization of public enterprises, an overhaul of the social security system and taxation and major cuts to public spending.  The main targets of privatization included the Narita and Haneda airports, the Tokyo Metropolitan Area Highway Public Corporation, the TMA Urban Development Corporation, the Housing Loan Corporation (which at present controls the majority of mortgage loans of Tokyo’s population) along with local universities and postal services.  The privatization of Housing Loan Corporation was a very major target achieved as it is said to control the world’s largest pool of savings, and because it brought a degree of confidence among population of Tokyo. Tax changes by Tokyo Metropolitan Assembly, the legislative organ of the whole prefecture of Tokyo, included the provision of tax breaks to business and stock market investors in TMA. Employers are also set to benefit through plans to make job related training expenses tax deductible. The plan also called for the privatization of Tokyo’s employee pension scheme.  This news will be particularly pleasing for foreign and domestic fund managers as the pension scheme, currently run by the government and backed by Japanese banks, is said to hold one of the biggest pool of pension assets in the world, according to a recent report in the Financial Times. In the words of one United States fund manager cited in the report: “What companies are competing for is probably the biggest honey pot in the world.” The plan also calls for the cutting of subsidies to local government which provide infrastructure and social services and the reallocation of tax revenues collected from automobile weight taxes, road tolls and petrol excises.  These taxes will be used in general spending of Tokyo Metropolitan Government and not solely on road construction (Lopez, 2008). This measure will bring furious opposition from construction companies in TMA, many of which have close connections to the ruling Liberal Democratic Party of Japan and have reaped large profits from construction programs. (Hiscock 2008) The moves for restructuring of the banking system, the privatization of the public sector, economic deregulation and cuts to government spending have drawn praise from the representatives of international capital.  However, they are also stepping up the pressure to ensure that Aso’s words are matched by deeds. United States Federal Reserve Board chairman Benjamin Bernanke has insisted that the disposal of bad loans is indispensable for the reconstruction of the Japanese economy.  International Monetary Fund managing director Dominique Strauss-Kahn praised Aso’s efforts to rehabilitate Japan’s economy through starting the structural reforms in its financial center Tokyo, and emphasized likewise that resolving the bad debt problem in the banking sector was government’s number one priority (Lopez 2008). However, while drawing praise from international financial circles, the plan, if implemented, will mean an economic and social catastrophe for millions of Japanese people.  According to research carried out by the Nippon Life Insurance and Dai-Ichi Mutual Life Insurance companies, if the banking sector is forced to write off the almost 13 trillion yen ($US 109 billion) in bad debts it could throw as many as 1.5 million people out of work, and of this number more than 350000 will be jobless in Tokyo Metropolitan Area.  This figure does not include the tens of thousands of jobs that would be destroyed as a result of corporate restructuring (the auto industry is an indicator of the extent of job losses that could take place), privatization of the public sector and those jobs that would be destroyed as a result of government spending cuts.  The economic plan calls for the creation of five million new jobs but gives no specifics.  The figure of five million is more than anything else an estimate of the number of jobs that the Council on Economic and Fiscal Policy thinks will be destroyed. Rather than fixing the economic situation, Aso’s reforms will worsen economic conditions in the country, and the greatest burden will be on TMA.        In its recently released report entitled “Bad Timing For Painful Reform”, the economic research firm Teikoku Databank stated: “Prime Minister ‘No Pain, No Gain’ approach to mending the economy will accomplish little more than a surge in bankruptcies and unemployment in the region…The pledge to go through with final disposal of banks’ bad loans (within two to three years) has the very worst timing . . . when the economy is headed for a downturn and at the same time that financial and fiscal policies can do little to help recovery.”        It warned that small to medium companies, which employ the largest proportion of the Tokyo’s workforce, would be the most likely to suffer.  Acute conflict of interest between banks and their borrowers will interrupt efforts to put weak firms back on their feet and increase the possibility of large scale bankruptcies, it said.  These warnings have been underscored by the latest GDP figures which point to further contraction of the economy in the coming months. The Japanese government seems to be running out of policy options, with interest rates already at near zero for the past year, and a series of economic stimulus packages which have failed to boost the economy.  Indeed, although Prime Minister Taro Aso remains popular with the public, his popularity shrank in TMA, as reported in recent Japanese Times online survey. Analysts and economists are worried that his plans for reform — however good they look on paper — will never make it to reality. Despite the slumping economy, Aso’s popularity ratings are unexpectedly high among the rest of the population.  That high level of support will be vital if he is to succeed.  His critics, including some representatives of his own party in the Tokyo Metropolitan Government House of Representatives, question whether Aso can push reforms at a time when Tokyo may need government support, to avoid a brutal downward spiral. Aso’s far-reaching economic restructuring plan hopes to make deep inroads into the living standards of working people.  One of the plans main architects was Finance Minister Shoichi Nakagawa, one of Aso’s most trusted advisers. In a recent interview he commented:  “Our agenda can be compared to what Margaret Thatcher did in the 1980s in Britain.  People say she cured the British disease. I hope to cure Japan’s malady, by curing the “financial virus” in Tokyo.”  (http://www.daylife.com/topic/Shoichi_Nakagawa/quotes) Transforming Tokyo into a Global Financial Center Japans Financial Services Agency, which oversees the nations banking and securities industries, under the decree of Tokyo Metropolitan Government, will draw up a plan by years end for transforming Tokyo into a global financial capital on par with New York and London. The Japanese government is also seeking ways to restore Tokyos position as unchallenged financial capital of Asia, and stay ahead of fast-rising rivals like Hong Kong and even Mumbai. Officials here hope the plan will help revive their countrys stock markets, which have far underperformed other major markets like Wall Street, even after the sub-prime turmoil. The crux of the Japanese plan is to create a new financial district in Tokyo that can lure foreign investment and financial professionals. So far, however, the initial drafts suggest that Japanese government is having trouble figuring out the secret of the Western financial centers success. Indeed, some of the proposals so far read more like excerpts from a real estate brochure than a manifesto for financial ascendance: there are proposals for building more spacious apartments, earthquake-resistant offices and plusher sports clubs (International Herald Tribune, 2008). One idea is to add restaurants that serve Western fare and that stay open until after midnight, to accommodate the grueling work hours of the financial industry. Drafts of the plan also call for adding English-speaking hospitals and schools and a faster train link to the main international airport, now a 90-minute trek from downtown. Less evident are the sorts of changes that might actually draw foreign professionals and firms: lower taxes, a larger English- speaking talent pool and greater transparency and restraint in market oversight by the Financial Services Agency itself. Critics say that the lack of more substantial measures reflect bureaucratic resistance by the financial agency, which fears losing its power, but an even bigger hurdle, say many, is a deep-seated aversion in Japan to finance, which is seen here as a dirty money game. This has made many politicians and economists reluctant to promote the financial industry instead of manufacturing, which Japanese celebrate as honest work from the sweat of the brow (The Economist, 2008). Besides New York and London, Hong Kong has risen as financier for fast-growing China. Singapore opened up to foreign investors, with low taxes and hands-off regulation. And Asia has spawned many new serious contenders such as Shanghai, Mumbai and Dubai. To make a comeback, Tokyo must reverse more than a decade of decline. The Tokyo Stock Exchange has fallen from being the largest stock market in the world in 1990 to No. 2, behind the New York Stock Exchange. During that time, the value of all shares traded on the Tokyo exchange rose 60 percent, to about $4.6 trillion at the end of last year. London, already the global center for trading in currencies, has seen its main stock market grow fourfold since 1990, and could soon overtake Tokyo. In recent years, the Tokyo Stock Exchange has actually grown less attractive for foreign companies because of high costs and language barriers. There are now 26 foreign companies listed on the exchange, down from 127 in 1991 (Fackler, 2008). While Japan remains Asias richest and most advanced economy, many here have been alarmed by the rise of neighboring China as an industrial powerhouse. Proponents of the financial-capital plan hope it will help Japan shift from a manufacturing center into a soft power like the United States, which finances and designs products while letting other countries build them. "The United States and England were both economically ill for a time, but succeeded in finding new growth in their financial industries," said Yuji Yamamoto, a former financial services minister who is a chief architect of the plan. "We need to emulate that success." (http://www.daylife.com/words/Yuji_Yamamoto_%28politician%29/quotes/all/1/related) Yamamoto visited New York, Washington and London in January, when he was still financial services minister. But the most memorable moment, he said, was walking around Wall Street, where he saw the offices of financial companies from around the world. London also made a deep impression because so many of the firms were from developing areas, like India, South America and the Middle East. In Tokyo, most firms are Japanese. "That is when I realized the secret of Wall Street and the City success was their ability to attract money and talent from all over the world," Yamamoto recalled (http://www.nationmaster.com/encyclopedia/Yuji-Yamamoto). He decided that the way to emulate that success was to turn Tokyos current financial district, Kabutocho, into a more international environment where foreign bankers and investors could feel comfortable living and doing business. Under his guidance, the Financial Services Agency led seven government agencies and committees in drawing up the plan. But, economists and investors say that so far the results have been disappointing. Most agree that Tokyo has enormous potential as a center for foreign companies, not only because of Japans great wealth but also because Tokyo is widely regarded as one of the safest and cleanest cities in Asia. But there are concerns the plan will do no more than create a ghetto for well-heeled foreigners. The proposals also fail to get at the biggest complaints of foreign investors and bankers: One is the fact that Japanese corporate and personal income taxes are far higher than those in freewheeling Hong Kong and Singapore (Kui 2006). Another is the onerous regulatory burden: a license to set up a new investment fund can take six months in Tokyo, versus two weeks in Singapore, investors say (Kui (2006). But the biggest sore point is the Financial Services Agency itself, which is widely criticized here as having enormous discretion in setting rules and enforcing them. Japans bureaucrats have long wielded murky powers over the private sector. Many foreign investors and financial professionals point to the agencys shutting down Citigroups Japanese private banking unit three years ago as an instance of heavy-handedness that scared foreign companies (Kui 2006) So, what is needed for Tokyo is a greater transparency and freedom from the Financial Services Agency and Japanese regulators, who are stifling the market with murky powers and enormous discretion in setting rules and enforcing them by guarding its power, byzantine paperwork and procedures, a change in attitude by both politicians and the private sector to dispel the popular perception that finance is a “dirty money game” (Lopez 2008), and is all about high corporate and personal income taxes. "Fact is, people would rather live in Tokyo," said Robert Feldman, an economist in the Tokyo office of Morgan Stanley. "But unless it changes its regulatory environment, no one will ever come here." (Wall Street Journal, February 2008) Conclusion From the arguments presented about Tokyo in this report, it is clearly visible that the financial giant of Asia is in deep crisis at present, whether the reason being the prediction of economists or the global financial turmoil is relatively irrelevant at this point in time. The major point is how the government plans to revive its economy. There are a number of plans being put forth as discussed in the later part of this report. The only determinant point is the fact that when these proposed plans would actually be put in to action. The urgency of this matter is a sure ground because the global financial crisis is on the rise and more and more economies are on the urge of declaring official recession. At this point in time, Tokyo needs to stand out and initiate its plan of action, because it is through this initiation only that all the suffering economies in Asia would benefit from, and ultimately lead the world out of this crisis. 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