Financial Times – Feb 18 2010
http://www.ft.com/intl/cms/s/0/f28580ea-1cc9-11df-8d8e-00144feab49a.html#axzz1WV4KM3Sy
Icons of competitive excellence are supposed to be immune from the failings of ordinary mortals. That was why the fall from grace of Tiger Woods was so disorienting. The evaporation of Toyota’s reputation for superhuman quality is even more shocking. After the eight million vehicle recall, it feels as if something comforting and hopeful has disappeared from the world for ever.
Toyota will certainly recover. No other auto company can match the range of its products and the strength of its manufacturing process. Indeed its US rivals have suffered recalls and safety problems of much greater scale than Toyota’s. But that’s like saying Tiger Woods’ transgressions were mild compared to the shenanigans of various football and basketball players. We had come to expect so much better.
Toyota’s problems cap a disastrous few years for the Japanese economy. In the long post-bubble malaise of the 1990s it was the globally uncompetitive domestic sectors that were in trouble – finance, real estate, and retail. The export industries that symbolized Japan’s economic miracle carried on regardless, buoyed by the seemingly limitless appetite of western consumers for ever more sophisticated toys.
The auto sector in particular went from strength to strength, steadily eroding the market share of Detroit’s Big Three and pushing them closer to the edge. The Japanese economy might have been in the doldrums, but its blue chip manufacturers continued to shore up corporate profits and national self-esteem. For a while it really did seem that what was good for Toyota was good for Japan.
The credit crisis changed all that. Despite the fact that Japan played little part in the excesses of the boom, it suffered the biggest hit to GDP amongst the major economies. The entire manufacturing sector, the mighty Toyota included, plunged into the red. Japan’s post-bubble strategy of focussing on high-grade “mono-zukuri” (manufacturing) while deflating the household sector has backfired spectacularly. What appeared to be a strength has turned out to be a vulnerability
So how can Japan bid sayonara to Toyota and the other blue chip exporters and reconfigure its economic strategy in favour of domestic demand?
The top priority has to be to exit deflation, which encourages the hoarding of cash, corrodes the credit-worthiness of borrowers, and depresses the animal spirits of consumers and entrepreneurs. In the fourth quarter of 2009, Japan’s GDP grew by 4.8% on an annualized quarter-on-quarter basis – a solid recovery, on the face of it. However nominal GDP shrank 3.3% year-on-year, and nominal private demand shrank by a shocking 6.8%. There can be no sustainable recovery with deflationary pressures of this scale.
Sadly one of the major obstacles to a successful anti-deflation strategy is Japan’s own central bank, which has painted itself into an intellectual corner by insisting that its own policy actions have no effect on the price level. This monetary nihilism allows it to dodge any responsibility for Japan’s long deflationary malaise. At the same time it ensures that the country with the world’s worst deflation problem receives the least monetary stimulus.
When the Bank of Japan was given independence in 1997, the political framework was inadequate, allowing the bank to decide not just the means but the goal of monetary policy. If the new Hatoyama administration is serious about boosting domestic growth, it has to remedy this oversight by setting a clear inflation target.
Pro-growth fiscal polices are needed too. Government indebtedness is the result, not the cause of Japan’s economic problems. Years of stagnation have eroded tax revenues as low-paid workers drop out of tax-paying brackets, profits slump and asset prices slide. The debt-to-GDP ratio cannot improve while the denominator is shrinking. The Hatoyama administration should pledge no fiscal squeeze until the target of 3% nominal GDP growth has been met for at least two consecutive years.
Finally the government must tackle Japan’s deflationary demographics. Turning round the birth rate should be a decade-long national goal, the equivalent of landing a man on the moon. The French-style child subsidies proposed by the government could make a significant difference if generous enough and broadly implemented. Greatly increased immigration from neighboring countries is not a possibility. It is a certainty. The only question is whether it is properly regulated or becomes an underground activity controlled by less salubrious private sector interests. The government should respond by expanding the student visa programme, and make permanent visas and citizenship easier to obtain.
None of this can be done quickly, but the need for a new Japanese economic strategy is clear. If Toyota’s troubles inspire new thinking, the loss of its divine aura will not have been in vain.