canadian embassy tokyo april 2006 can a changing japan meet the productivity challenge in the...
TRANSCRIPT
Canadian EmbassyTokyo
April 2006
Can a changing Japan meet theproductivity challenge in the long-run?
Japan’s Economy RecoveredJapan’s Economy Recovered
2
– Current Outlook and IssuesCurrent Outlook and Issues– Macroeconomic situation, regional
economies, business, banks and labour, monetary policy normalisation
– StrengthsStrengths– Size, wealth, technology,
manufacturing, Asian integration
– Productivity challengeProductivity challenge– Demographics, LT structural change,
efficiency, bureaucracy
– AssessmentAssessment– Is Japan’s economy recovering?– What does this mean for Canada and
the world?
OverviewOverview
3
– Current macro outlookCurrent macro outlook
– Regional economiesRegional economies
– Business resurgenceBusiness resurgence
– Financial sector revivalFinancial sector revival
– Labour market upturnLabour market upturn
– Hot topicHot topic: monetary : monetary policy normalisationpolicy normalisation
Current trendsCurrent trendsand issuesand issues
4
2.7% growth in ’05- After 2.3% in ‘04
Strong end to ‘05- 05Q4: 5.4% q/q annualized- 05Q4: 4% over 04Q4
’06 and ‘07 forecastquite robust - Consensus of Japanese
forecasters (for fiscal year ending in March):- FY05: 3.4%- FY06: 2.6%, - FY07: 2.4%
Note: in 2005, Canada’s economy grew2.9%, with much faster population growth.
Economic growth:Economic growth:Real GDP growth strong in 2005
Source: Cabinet Office, Japan
Real GDP y/y % (05 preliminary)
0.4
0.1
1.8
2.3
2.7
0
0.5
1
1.5
2
2.5
3
01 02 03 04 05
Calendar year
5
Contributions to y/y real GDP growth % (05preliminary)
1.2
2.1
0.8
1.8
0.7
-0.3
1.1
1.8
2.3
0.6
-0.5
1.1
0.3
-0.3-0.5 -0.5
1.1
0.4
0.5
-0.8
0.7
0.6
0.8
-0.1
-1.9
-0.1
-0.1
0.1
0.9
0.2
-0.2
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
95 96 97 98 99 00 01 02 03 04 05
Calendar year
Final domestic sales Public demand Net Exports
Private andDomesticGrowth stimulus– Domestic final
sales (private cons. & invest. net of inventory changes) now growth driver
– Unlike 90s, public demand is weak: sharp cuts in public works
Modest netexport growth:– Economy firing
on all cylinders
GDP Growth:GDP Growth:More sustainable now
““Tech bubble”Tech bubble”
Source: Cabinet Office, Japan
Real GDP
6
NAGOYA: booming manufacturing centre
Recovery by city and region:Recovery by city and region:Boom centered on industrial heartland, urban areas
OSAKA-KYOTO-KOBE: re-emerging second urban region of Japan
Recovering strongly: robust growth overall; very tightlabour market; industry, services, real estate increasingly buoyant
Recovering: firm growth; tightening labour market;industry and services solid
Recovering mildly: growth picking up; labour market,Industry and services recovering, although picture is uneven
Signs of a turnaround: growth remains slow.Labour market slack remains; modest pickup in some industries
HIROSHIMA: Dynamic regional centre
FUKUOKA:modern city with
growing ties to NE Asia
Source: Cabinet Office, Embassy estimations
SAPPORO: Northern centreat heart of agri-food & tourism region
TOKYO-YOKOHAMA: growing financialand economic metropolis; world’s biggest city
with economy larger than Canada’s
Stagnant/Recession: no regions in thiscategory at this time
7
-3
-2
-1
0
1
2
3
annu
al
annu
al
annu
al
annu
al Q3
Q4
Q1
Q2
Q3
Q4
FY00 FY01 FY02 FY03 CY04 CY05
Core CPI CGPI
CSPI GDP Deflator
CPI inflationnow mildly positive– Core CPI 0.5% y/y Jan 06– Corp. goods prices – GDP deflator
– import prices key factor
BoJ has calledend of deflation: – “Quantitative easing” over:
– BoJ now targetting 0% interest rate
– Interest rates will stay at or near zero this year
– BoJ wants CPI at 0-2%
Deflation:Deflation:Easing…ending?
Source: Bank of Japan
0
Change in prices (y/y%)
8
Business sector recoveryBusiness sector recovery
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
19
80
Jan
.*Ma
r.
19
81
Jul.*S
ep
.1
98
3 Ja
n.*M
ar.
19
84
Jul.*S
ep
.
19
86
Jan
.*Ma
r.
19
87
Jul.*S
ep
.
19
89
Jan
.*Ma
r.1
99
0 Ju
l.*Se
p.
19
92
Jan
.*Ma
r.
19
93
Jul.*S
ep
.
19
95
Jan
.*Ma
r.
19
96
Jul.*S
ep
.1
99
8 Ja
n.*M
ar.
19
99
Jul.*S
ep
.
20
01
Jan
.*Ma
r.
20
02
Jul.*S
ep
.
20
04
Jan
.*Ma
r.2
00
5 Ju
l.*Se
p.
Restructuring payingoff, debt bubble gone– Corporate debt/GDP ratio now
below 1980 level (HSBC)– debt repaid by non-financial
corp’s: 40% of GDP!– Liab. / bal.sheet ratio lowest in 50
yrs. (Morgan Stanley)
Non-financial firms maybe in best shape ever– Profitability at 50-year highs– Q405: 14th consecutive Qtr. of
y/y profit growth– Longest period since 1960s
– Confidence, return on equity at post-bubble high
Non-financial firm profitability(current profit/sales - 4Q moving average)
“Property bubble”
“IT Bubble”
Source: Ministry of Finance
9
Banking sector revivalBanking sector revival
Non-perfoming Loans (NPLs) at major banks
5.7%
8.7%
7.1%
5.1%
2.9%2.4%
0
5
10
15
20
25
30
35
EndFY00
FY01 FY02 FY03 FY04 FY05H1
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Total NPLs -- trillions of yen -- left scaleNPLs as percentage of total
Source: Bank of Japan
NPL problem fixed “Takenaka plan” to halve
2001 NPLs by 2004 exceeded
Capital adequacy, quality improved
Banks repaying pub. funds
Profit recovery isless certain FY05H1 saw highest profits
on record, but spreads tight and loan growth slow
Key: fee-based financial services
Rising interest rates will help bank profits
10
Unemployment (% of labour force)
0
1
2
3
4
5
6
FY
95
FY
96
FY
97
FY
98
FY
99
FY
00
FY
01
FY
02
FY
03
FY
04
End C
Y05
Labour market upturnLabour market upturnRecovery may finally be spreading to the labour market
Restructuring = job cuts– Aging-driven labour force decline– “excess” labour throughout 1990s
Full-time jobs up again– Growth had been in part-time
jobs, full-time jobs were falling. This trend has reversed.
– Latest unemployment rate: 4.1%– Offers/applicant ration 1:1!
– Firms now perceive labour shortage
Rising incomes key torecovery, deflation end– Nominal employee compensation
rose 2.6% in 05Q4 over 04Q4Source: Bank of Japan
11
Hot topic: monetary policyHot topic: monetary policyWhat will the impact be of normalisation, rising i-rates?
overall in Japan Household (HH) assets = 4X HH debts consumption boost offsets profit impact; banks benefit from better spreads BUT: gov’t has to pay higher interest; book value of bondholdings fall,
overseas assets may suffer, possibly gold
1: Source: Nomura securities
Interest
rates
increase
1%
2: Source: Goldman Sachs
Gov’tinterestexpense
rises over time as debt rolled over
(JGBs= 150%Of GDP,Held 95%In Japan)
but, gov’tspending rises…
Book valueof JGB
holdingsfalls
Overseas Assets
Suffer as“carry trade”
abates
and JGBs, overseas assets fall.
Households gainY7.8 trillion2
Cons. spendingRises 0.8%1
Modest rise inprofits2
Loan spreadsimprove
Households, firms,banks benefit…
What if ratesincrease?
12
– Size, wealthSize, wealth
– manufacturing productivitymanufacturing productivity
– technologytechnology
– Asia’s rise and economic integrationAsia’s rise and economic integration
Japan’s strengthsJapan’s strengths
13
KANTO
TOKAI
KANSAI
Size and wealth:Size and wealth:2nd biggest economy; biggest net creditor
Japan’s GDP:─ larger than rest of Asia─ equal to the combined
economy of all US states west of the Mississippi
(Tokyo Metro Region)
(Osaka-Kobe-Kyoto Region)
(Nagoya-Shizuoka Region)
= GDP larger than China’s, twice Canada’s
= GDP larger than India’s or Brazil’s
= GDP larger than Mexico’s or Korea’s
Kanto+Tokai – GDP larger than Germany’s – but Tokyo-Nagoya distance is less
than Montreal-Toronto
Despite gov’t debt,net foreign position
was CAN$ 2.2 trillion(What Japan is owed)–(what Japan owes) =
(Canada’s annual GDP X 2)
Individual financial assets in Japan= $CAN 17 trillion (280% ofGDP)= 4 times household liabilities
14
Strengths:Strengths:Manufacturing productivity, leading industries
Leader in manufacturing productivity– Japanese manufacturing productivity is 20% higher than in US
– This partly explains Japan’s trade surplus with the world.
Growing lead in key industrial sectors– E.g: “PAX TOYOTA”: it can be argued that Japanese automotive
“empires” are dictating terms of global auto industry– Result is growing prosperity in the “imperial capitals”, the Japanese
design and manufacturing centres (eg: Nagoya)– Leadership brings obligation to maintain “peace”, avoid trade friction
Strong investment in key markets, notably NAFTASome “restraint” in pricing strategy to avoid crippling US co’s
– Strong leadership in others sectors: Japan HQs global finance and tech hubs, from chemicals to electronics
15
Strengths:Strengths:Technology and R&D
Japan is R&D leader
– Highest R&D/GDP ratio in G7 (over 3% in 2001)
– Canada 3rd lowest in 2001 (<2%)
Japanese R&D = Total investment in Canada
R&D as Ratio of National GDP in G7 Countries (2001)
0
0.5
1
1.5
2
2.5
3
3.5 JapanUSGermanyFranceCanadaUKItaly
Result is tech leadership– “Old” industries have gone high-tech (eg: chem., steel)– Final assembly no longer key to value-added:
– eg: digital appliances; according to METI:– “Made in Japan” (ie: final assembly in Japan) products: 27% of global market– BUT, Japan supplies 51% of global high-tech parts and semiconductors, 54%
of manufacturing devices, and 65% of high-tech materials
– Higher energy efficiency than competitors (eg: US, Korea, China)
* Source: OECD
* Note: For Italy, the graph is based on the latest available data for 2000
16
Japanese exports (1990=100)
50
100
150
200
250
300
350
400
1990 92 94 96 98
2000 02
total US + EU
east asia china*
Strengths: Strengths: Japan a player in Asia’s rise and integration
Japan key to Asia growth pole– On the surface, US+EU becoming less
important in Japan’s trade– Japanese aid and FDI historically top
source in many Asian countries
China, ASEAN processJapan’s exports to US, EU; also products for Japanese market– Asia buys Japan’s tech. and capital
Japan trade surplus with China, Korea– Japan’s firms drive processing trade– Dynamic means US growth still has
twice impact on Japan as China’s– Chinese export growth key to Japan
Will Japan’s firms reach thenew Asian consumer? Source: Ministry of Finance, Japan
17
– Population decline– Productivity acceleration?– Long-term structural change– Capital allocation improvements– Remaining policy challenges– Decline or opportunity?
Japan’sJapan’sproductivity productivity
challengechallenge
Photos: Nikkei Weekly
18
Population declinePopulation declineThe demographic imperative for faster productivity growth
Source: Ministry of Internal affairs and communications
Japan’s population is now falling:
– 2005 saw first slight overall pop. decline
By 2050:– Down to 100M– 30 million less
people of working age (15-64)
– 10M more people age 65 and over
Total Population (thousands)
100,593
83,200
2005 =127,757
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
1950
1960
1970
1980
1990
2000
2010
f
2020
f
2030
f
2040
f
2050
f
19
Productivity acceleration?Productivity acceleration?Is the increase structural or temporary after slowdown?
Source: Cabinet Office
GDP/hour y/y growth slowed after bubble
– GDP/hour y/y growth slower in 94-03 vs. 85-93 (OECD)
Has productivity growth picked up again?
– GDP/hour y/y growth was well above trend in 2005
Key question: is Japan different than during post-bubble period in a structural way?
GDP/hour worked y/y%
3.40%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
Embassy Calculation based on Cabinet Office and Ministry of Labour data
20
Long-term changeLong-term changeDespite “stagnation” -- major structural shifts occurred
0%
20%
40%
60%
80%
100%
1990 1994 1998 2002
TERTIARYSECONDARYPRIMARYSource: Cabinet Office
Like in all advancedeconomies, the tertiary (services)sector’s share isgrowing:– The share of services in
GDP increased 10% between 1990 and 2002
– The share of manufacturing has fallen by 9% of GDP
21
Increased openness to tradeIncreased openness to tradeJapanese markets are becoming more contestable
Source: Cabinet Office
Share of trade in economy is growing:
– Asian integration: growing two-way trade with China and other Asian economies
Long term may see a trade deficit
– Recovery and aging: savings down, cons. up
– current acc’t will stay positive: foreign inv. income
14.76%
9.47%13.35%
7.10%
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
Trade balance/GDP Exports/GDP Imports/GDP
22
Capital allocation improvingCapital allocation improvingBig problem in 1990s was poor allocation of capital
Source: Cabinet Office
Overall, Japan is investing less as a share of GDP:
– Less total investment– Significant decrease in
public investment
Trend suggests I/GDP ratio is edging up:
– Due entirely to strong growth in private investment
– Firms increasing their capital, productivity, to meet growing demand, face labour shortages
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Fixed capital formation/GDPPublic Investment/GDPPrivate capital formation/GDP
23
Areas for further improvement:Areas for further improvement:Capital market, services, agriculture
Capital marketefficiency is improving– Households: 50% in cash; but
interest in risk assets is rising– Corp. fin was too bank-led
– Now: Co’s borrowing less, issuing more stock, bonds
– Lending down from peak (-20%), but may be on rise again: syndicated loan boom
– Corp. control more market-driven, arm’s-length investors now lead
– M&A, private equity booming– Efficiency was postal reform
key motive
Services need further reform
– lag US productivity up to 40%– Competition weak, but reforms
progressing: prices falling (e.g: utilities)
– OECD: Japan ahead on privatization, limiting financial interventionism, lags in dereg
Agriculture too protected─ Protection among highest in OECD─ Gov’t too slow to reform ag.
─ BUT, ag trade opportunities may spur new openness (eg: apples)
24
Government:Government:Debt, deficit and bureaucratic inefficiency
Rising debt, large deficit– 95% of debt held in Japan– Deficit 5-6% of GDP
– balance not likely until 2010s– Taxes among lowest in OECD
Aggressive cuts are risky– At odds with anti-deflation driveGov’t small, but inefficient– Red tape barrier to growth:
– privatization accomplished, but deregulation a work in progress
– Reform: better gov’t, not smaller – public works cuts, gov’t FI reform
– Rising social security costs: gov’t will get bigger (G/GDP)Source: IMF
Net public debt (% of GDP)
0
10
20
30
40
50
60
70
80
90
100
1999 2000 2001 2002 2003 2004 2005f 2006f
Canada Japan
25
Aging and population decline:Aging and population decline:Demographic challenge or opportunity?Demographic challenge or opportunity?
Aging or “greying” a milestone of social progress– Older people living longer healthier lives
– Japan asking what is place/role of elders beyond “dependency”?
Low birthrate (1.29) challenge, but also opportunity – Challenge: women not participating fully in paid economy
– Men: participation rate highest in OECD; women: among the lowest
– Can demog. decline mitigate social costs that plague Japan?– crowding, env. pressure, resource dependence
– Key policy priority: reform to boost output, taxes per worker– social security costs will double in the next 20 years– Capital reallocation + tech can increase productivity (labour,TFP)
Demog. decline does not mean lower living standard per capita GDP growth > GDP growth (eg: GDP 2%; pop –0.5%)
26
– Are Japan’s economic woes over?– What is the long-term future of Japan’s economy?– What does this mean for Canada and the world?
AssessmentAssessment
27
Are Japan’s economic woes over?Are Japan’s economic woes over?What is Japan’s long-term economic future?
Japan recovered, resilient, but LT challenges remainJapan recovered, resilient, but LT challenges remain– Shift from export-led growth to domestic demand well underway– Last short-term challenge is to normalize monetary policy– Falling population and fiscal constraint means Japan needs to boost its
productivity growth again: the reform imperative remains
Sudden change not Japanese way, but Japan is evolvingSudden change not Japanese way, but Japan is evolvingat an accelerating paceat an accelerating pace– China factor, Asian integration: Asia is Japan’s new strategic focus– Demographic change and new generation with different values– Stronger private sector, a government forced to change by finances,
households taking risks once again
TThe future will not be like the pasthe future will not be like the past– If handled right, the Japan that evolves will be fundamentally stronger
than the bubble economy that was so feared in the 80s; Japanese firms may already be in the best financial shape ever
28
Short-term outlook: main risks
DownsideDownside: Global economy, the US dollar and global: Global economy, the US dollar and globalimbalances, higher oil pricesimbalances, higher oil prices– Chinese economy stumbles hard and cuts off export growth– US looks good, but housing bubble bursting is a risk– US dollar fall would cause rapid yen rise and slow exports– Japan is energy efficient, so direct effect of high oil is
lessened, but may slow growth in key export markets
Upside:Upside: stronger than expected consumer revival, stronger than expected consumer revival,productivity growthproductivity growth– Labour market tighter; companies are increasing bonuses,
dividends and starting raise wages– Domestic demand may continue to surprise to the upside
– Improved capital allocation, labour shortages: more productive investment and rising productivity is possible
29
Japan is contributing to global growth againJapan is contributing to global growth again– The world’s second largest economy is integral part of Asian
growth pole, and imports are gaining as a share of GDP
Emerging Japan-US-China economic triangleEmerging Japan-US-China economic triangle
– “Imbalance” or a deepening of global integration? – Japan a big market, but is increasingly hub of investment and tech.– How does Canada “plug in to the network”?
Japanese government must change its relationship Japanese government must change its relationship with its people, but also with the world:with its people, but also with the world:– “less aid, more trade” applying both at home and abroad– Chequebook politics and diplomacy too expensive now: Japan will
seek influence through other means
AssessmentAssessmentWhat does this mean for the world?
30
– Opportunities for trade in traditional & emerging sectors
• Resources, housing, agriculture
• Innovation and science partner: IT, environmental technologies, nanotechnology, robotics, biotechnology, pharmaceuticals
• Investment partner
– Prospects for new partnerships in technology, services and investment, key areas of future growth
– Demographics mean significant change in consumption patterns, new opportunities particularly in services
– Canadian companies can take advantage of Japan’s central place in the booming Asian economy– We must see Japan as Asia’s financial and tech hub, very much
complementary to Asian high growth economies. – New International Policy Statement recognizes this.
AssessmentAssessmentWhat does this mean for Canada?What does this mean for Canada?
31
The Canadian Embassy in Tokyo, Japan7-3-38 Akasaka, Minato-ku, Tokyo 107-8503
Tel: (81) 3 5412-6200 Web: http://www.dfait-maeci.gc.ca/ni-kaContact:Laurence BlandfordFirst Secretary, Finance and EconomyEmail: [email protected]