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7/30/2019 Canadian Embassy Tokyo en 04 06
1/31
Canadian Embassy
TokyoA ril 2006
Can a changing Japan meet theproductivity challenge in the long-run?
Japans Economy Recovered
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Current Outlook and Issues Macroeconomic situation, regional
economies, business, banks and
labour, monetary policy normalisation
Strengths Size, wealth, technology,
manufacturing, Asian integration
Productivity challenge Demographics, LT structural change,
efficiency, bureaucracy Assessment
Is Japans economy recovering?
What does this mean for Canada and
the world?
Overview
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Current macro outlook Regional economies
Business resurgence
Financial sector revival
Labour market upturn
Hot topic: monetarypolicy normalisation
Current trends
and issues
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2.7% growth in 05- After 2.3% in 04
Strong end to 05- 05Q4: 5.4% q/q annualized
- 05Q4: 4% over 04Q406 and 07 forecastquite robust- Consensus of Japanese
forecasters (forfiscal year
ending in March):- FY05: 3.4%
- FY06: 2.6%,
- FY07: 2.4%
Note: in 2005, Canadas economy grew2.9%, with much faster population 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
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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. netof inventorychanges) nowgrowth driver
Unlike 90s, publicdemand is weak:sharp cuts in
public worksModest netexport growth:
Economy firingon all cylinders
GDP Growth:More sustainable now
Tech bubble
Source: Cabinet Office, Japan
Real GDP
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NAGOYA: booming manufacturing centre
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 withgrowing ties to NE Asia
Source: Cabinet Office, Embassy estimations
SAPPORO: Northern centreat heart of agri-food & tourism region
TOKYO-YOKOHAMA: growing financialand economic metropolis; worlds biggest city
with economy larger than Canadas
Stagnant/Recession: no regions in thiscategory at this time
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-3
-2
-1
0
1
2
3
annual
annual
annual
annual
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:Easingending?
Source: Bank of Japan
0
Change in prices (y/y%)
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Business sector recovery
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
1980Jan.*Mar.
1981Jul.*Sep.
1983Jan.*Mar.
1984Jul.*Sep.
1986Jan.*Mar.
1987Jul.*Sep.
1989Jan.*Mar.
1990Jul.*Sep.
1992Jan.*Mar.
1993Jul.*Sep.
1995Jan.*Mar.
1996Jul.*Sep.
1998Jan.*Mar.
1999Jul.*Sep.
2001Jan.*Mar.
2002Jul.*Sep.
2004Jan.*Mar.
2005Jul.*Sep.
Restructuring payingoff, debt bubble gone
Corporate debt/GDP ratio nowbelow 1980 level (HSBC) debt repaid by non-financial
corps: 40% of GDP! Liab. / bal.sheet ratio lowest in50 yrs. (Morgan Stanley)
Non-financial firms maybe in best shape ever
Profitability at 50-year highs Q405: 14th consecutive Qtr. ofy/y profit growth Longest period since 1960s
Confidence, return on equity atpost-bubble high
Non-financial firm profitability(current profit/sales - 4Q moving average)
Property bubble
IT Bubble
Source: Ministry of Finance
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Banking 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
End
FY00
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 halve2001 NPLs by 2004exceeded
Capital adequacy, qualityimproved
Banks repaying pub. funds
Profit recovery isless certain
FY05H1 saw highest profitson record, but spreads tightand loan growth slow
Key: fee-based financialservices
Rising interest rates will
help bank profits
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Labour 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-timejobs, 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
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Hot 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: govt 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
Govt
interest
expense
rises over
time as debt
rolled over
(JGBs
= 150%
Of GDP,
Held 95%
In Japan)
but, govtspending rises
Book value
of JGB
holdings
falls
Overseas
Assets
Suffer as
carry trade
abates
and JGBs, overseasassets fall.
Households gain
Y7.8 trillion2
Cons. spending
Rises 0.8%1
Modest rise in
profits2
Loan spreads
improve
Households, firms,banks benefit
What if ratesincrease?
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Size, wealth
manufacturing productivity
technology
Asias rise and economic integration
Japans strengths
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KANTO
TOKAI
KANSAI
Size and wealth:2nd biggest economy; biggest net creditor
Japans GDP: larger than rest of Asia
equal to the combinedeconomy of all US stateswest of the Mississippi
(Tokyo Metro Region)
(Osaka-Kobe-Kyoto Region)
(Nagoya-Shizuoka Region)
= GDP larger than Chinas, twice Canadas
= GDP larger than Indias or Brazils
= GDP larger than Mexicos or Koreas
Kanto+Tokai
GDP larger than Germanys but Tokyo-Nagoya distance is less
than Montreal-Toronto
Despite govt debt,net foreign position
was CAN$ 2.2 trillion
(What Japan is owed)(what Japan owes) =(Canadas annual GDP X 2)
Individual financial assets in Japan= $CAN 17 trillion (280% ofGDP)
= 4 times household liabilities
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Strengths:Manufacturing productivity, leading industries
Leader in manufacturing productivity Japanese manufacturing productivity is 20% higher than in US
This partly explains Japans 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 NAFTA
Some restraint in pricing strategy to avoid crippling US cos
Strong leadership in others sectors: Japan HQs global financeand tech hubs, from chemicals to electronics
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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 (
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Japanese exports (1990=100)
50
100
150
200
250
300
350
400
1990 9
2 94 96 98
2000 0
2
total US + EU
east asia china*
Strengths:Japan a player in Asias rise and integration
Japan key to Asia growth pole On the surface, US+EU becoming less
important in Japans trade
Japanese aid and FDI historically topsource in many Asian countries
China, ASEAN processJapans exports to US, EU; alsoproducts for Japanese market
Asia buys Japans tech. and capital Japan trade surplus with China, Korea
Japans firms drive processing trade Dynamic means US growth still hastwice impact on Japan as Chinas Chinese export growth key to Japan
Will Japans firms reach thenew Asian consumer? Source: Ministry of Finance, Japan
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Population decline Productivity acceleration? Long-term structural change
Capital allocation improvements Remaining policy challenges Decline or opportunity?
Japans
productivitychallenge
Photos: Nikkei Weekly
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Population declineThe demographic imperative for faster productivity growth
Source: Ministry of Internal affairs and communications
Japans population isnow falling:
2005 saw first slight
overall pop. declineBy 2050: Down to 100M
30 million lesspeople of workingage (15-64)
10M more peopleage 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
2010f
2020f
2030f
2040f
2050f
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Productivity acceleration?Is the increase structural or temporary after slowdown?
Source: Cabinet Office
GDP/hour y/y growthslowed after bubble
GDP/hour y/y growthslower in 94-03 vs.
85-93 (OECD)Has productivity growthpicked up again?
GDP/hour y/y growthwas well above trendin 2005
Key question: is Japandifferent than during post-bubble period in astructural 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%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Embassy Calculation based on Cabinet Office andMinistry of Labour data
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Long-term changeDespite stagnation -- major structural shifts occurred
0%
20%
40%
60%
80%
100%
1990 1994 1998 2002
TERTIARY
SECONDARY
PRIMARYSource: Cabinet Office
Like in all advancedeconomies, thetertiary (services)
sectors share isgrowing: The share of services in
GDP increased 10%between 1990 and 2002
The share ofmanufacturing has fallenby 9% of GDP
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Increased openness to tradeJapanese markets are becoming more contestable
Source: Cabinet Office
Share of trade ineconomy is growing:
Asian integration:growing two-waytrade with Chinaand other Asianeconomies
Long term may see atrade deficit
Recovery and
aging: savingsdown, cons. up
current acct willstay positive:foreign inv. income
14.76%
9.47%13.35%
7.10%
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
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
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Capital allocation improvingBig problem in 1990s was poor allocation of capital
Source: Cabinet Office
Overall, Japan isinvesting less as ashare of GDP:
Less total investment
Significant decrease in
public investmentTrend suggests I/GDPratio is edging up:
Due entirely to stronggrowth in private
investment Firms increasing their
capital, productivity, tomeet growing demand,face labour shortages
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Fixed capital formation/GDPPublic Investment/GDPPrivate capital formation/GDP
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Areas for further improvement:Capital market, services, agriculture
Capital marketefficiency is improving
Households: 50% in cash; butinterest in risk assets is rising
Corp. fin was too bank-led Now: Cos borrowing less,issuing more stock, bonds
Lending down from peak (-20%), but may be on riseagain: syndicated loan boom
Corp. control more market-
driven, arms-length investorsnow 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 reformsprogressing: prices falling (e.g:
utilities) OECD: Japan ahead onprivatization, limiting financialinterventionism, lags in dereg
Agriculture too protected
Protection among highest in OECD Govt too slow to reform ag.
BUT, ag trade opportunities mayspur new openness (eg: apples)
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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 drive
Govt small, but inefficient Red tape barrier to growth:
privatization accomplished, but
deregulation a work in progress Reform: better govt, not smaller
public works cuts, govt FI reform
Rising social security costs: govt 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
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Aging and population decline: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%; pop0.5%)
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Are Japans economic woes over?
What is the long-term future of Japans economy? What does this mean for Canada and the world?
Assessment
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Are Japans economic woes over?What is Japans long-term economic future?
Japan 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 itsproductivity growth again: the reform imperative remains
Sudden change not Japanese way, but Japan is evolvingat an accelerating pace China factor, Asian integration: Asia is Japans 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
The 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 firmsmay already be in the best financial shape ever
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Short-term outlook: main risks
Downside: Global economy, the US dollar and globalimbalances, 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: stronger than expected consumer revival,productivity 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 productiveinvestment and rising productivity is possible
A t
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Japan is contributing to global growth again The worlds second largest economy is integral part of Asian
growth pole, and imports are gaining as a share of GDP
Emerging 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
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 willseek influence through other means
AssessmentWhat does this mean for the world?
A t
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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 andinvestment, key areas of future growth
Demographics mean significantchange in consumptionpatterns,new opportunities particularly in services
Canadian companies can take advantage ofJapans central placein the booming Asian economy We must see Japan as Asias financial and tech hub, very much
complementary to Asian high growth economies.
New International Policy Statement recognizes this.
AssessmentWhat does this mean for Canada?
The Canadian Embassy in Tokyo Japan
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The Canadian Embassy in Tokyo, Japan
7-3-38 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]