Now, at last, some real insight into the palpitating heart of Japan’s economic troubles.
Some may have thought that finance minister Shoichi Nakagawa simply had a little jetlag, helped along by imbibing a little too much Italian wine at the lunch for G7 finance ministers in Rome.
No, no, no – the man had a cold and had taken too much cold medicine, he told Japanese lawmakers on Monday.
Whatever the reason, Nakagawa’s clearly visible incapacity to state the current level of Japanese interest rates – or comment on economic issues in a totally coherent way - at the meeting has fuelled concerns in some circles about Tokyo’s economic management skills.
International news media covering the G7 meeting reported that Nakagawa’s speech was slurred at the post-G-7 news conference; and on Monday, Japanese domestic broadcasters repeatedly aired the stories with zoom-in footage of Nakagawa’s face (see a YouTube clip here).
Unfortunately for the increasingly unpopular government of Prime Minister Taro Aso, Nakagawa’s “Chianti-gate” came on the same day that Japan reported the most horrible economic growth figures for 35 years – an annual drop of 12.7 per cent last quarter.
As local blog Japan Today noted, ABC News ran a story online titled “Asleep at the Wheel: Japanese FM Nods Off During G-7 Talks,” in which it noted that if the contracting economy and pursuant massive job losses at Japan’s biggest car manufacturers weren’t enough to keep him awake, there was surely Italian espresso.
Nakagawa slurred, verbally stumbled and verged on the incomprehensible during a press conference with Japanese press on Saturday afternoon in Rome, leading some to label him a “disgrace” the blog noted:
Nakagawa stumbled along in the interview: “The G-7 meetings…which were officially held today… started last night….there was something like a joint declaration. I heard America’s proposals…umm…and G-20 policies for moving forward…”
Nakagawa also cut in to a question aimed at Masaaki Shirakawa, the governor of the Bank of Japan, who was also in attendance. Nakagawa then misquoted the central bank’s interest rate, currently at 0.1%. “It’s going up from 0 to 0.25%? Well it’s still extremely low.”
Government aides said it was the worst they had ever seen Nakagawa.
Not only that. In Japan, the incident has revived memories of Nakagawa’s earlier – er, slurred and unco-ordinated behaviour, including a recent debacle in the Diet, or parliament, when his attempt to read out a speech was semicomprehensible, as was a now infamous speech during his 2000 election campaign.
Japan’s opposition lawmakers have little sympathy (in Japan, losing face – particularly before important guests – is a bigger crime than most), calling Monday for Nakagawa’s resignation.
The beleagured (and we presume hung-over) minister said Prime Minister Taro Aso would decide how to respond to calls for his resignation. Not helping matters, former Prime Minister Yoshiro Mori earlier in the day also weighed in to criticise Nakagawa for his behaviour: ‘‘Since he really loves to drink, I advised him once to be careful about drinking,’’ Mori told morning TV.
The incident – and Mori’s remarks, which in Japanese strongly suggested doubts about Nakagawa’s qualifications for the job – were the latest blow to Aso. As Bloomberg notes, the prime minister’s popularity has slid in recent days to the second-lowest on record for a Japanese leader – to a miniscule 9.7 per cent in a Nippon TV news survey from 17.4 per cent, the poorest showing since – well, Yoshio Mori’s administration in 2001. His disapproval rating climbed to 76.2 per cent.
Aso needs to call elections by September. But “asleep at the wheel” appears already to have become a motto that may well haunt him up to the polls – judging by Monday’s figures and predictions that things can only get worse. As Bloomberg summed up: Japan’s economy shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, as recessions in the U.S. and Europe triggered a record drop in exports. Gross domestic product fell for a third straight quarter in the three months ended Dec. 31, the Cabinet Office said today in Tokyo. The median estimate of 26 economists surveyed by Bloomberg News was for an 11.6 percent contraction.
Exports plunged an unprecedented 13.9 percent from the third quarter as demand for Corolla cars and Bravia televisions collapsed amid a slump that thethat the Group of Seven nations said will persist for most of 2009. Toyota Motor Corp., Sony Corp. and Hitachi Ltd. — all of which forecast losses — are firing thousands of workers, heightening the risk a decline in household spending will prolong the recession.
“The economy is in terrible shape and the scary part is that we’re likely to see a similar drop this quarter,” said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. “All we can do is wait for overseas demand to pick up.”
The Times quoted economists saying the accute decline in Japan’s GDP highlights the fact that, even without its banking system suffering much from the sub-prime crisis, the Japanese economy has been hit harder and faster by the global downturn than either Western or other Asian economies.
If you doubt that for a moment, see the graphic below (HT Econbrowser via Paul Kedrosky)
The growing criticisms are fuelling calls for further stimulus measures and lawmakers from the ruling LDP are discussing figures of Y20,000bn to Y30,000bn (aobut $220bn to $320bn). As RBS’s Japan economic research team noted on Monday, the growing view is that without further measures, the country really could fall off a cliff.
The markets’ focus has already shifted toward forthcoming Q1 figures, RBS’s Junko Nishioka says in a note on Monday.
Considering auto makers’ production cuts in Q1 and the sharp drop of corporate earnings, we expect the Japanese economy is going to record large minus growth in Q1 09.of around -5.6% QoQ annualized, but likelihood of further revisions down is quite high.
The negative output gap is likely to widen to the largest level since 1975, RBS estimates to -2.1 per cent in the final quarter of 2008, matching the level in 1975.
While it is unclear how much of the proposed Y20,000bn-Y30,000bn stimulus (what the Japanese call “supplemental budget”) would be real spending (or mamizu in Japanese), some LDP members are already calling to ensure more than Y10,000bn in “real” new spending – though RBS reckons a minimum Y20,000bn in real spend is necessary to compensate for the widening minus-GDP gap in the near term.
Of course, we need to consider multiplier effect to estimate the impact of public investment on GDP. However, it is clear that unless the additional economic package is implemented, the large negative GDP gap is likely to remain for longer term, which could lead to deflation.
Meanwhile, notes RBS, funding resources may include deficit-covering JGBs, construction JGBs, hidden reserves in the FILP special account and zero coupon. At any rate, Japan’s fiscal premium is likely to rise in the near term. Already, Japanese government bond prices have fallen on concerns about a big new round of Japanese government debt sales.
The hapless finance minister, meanwhile, may be in need of further medicine – very shortly.
Related Links:
Japan’s economy shrinks 12.7% – Bloomberg
More on Japan’s black hole – LongRoom
Land of the rising sun – closer to the precipice? – FT Alphaville
Nicolas Sarkozy drunk – Youtube