Remember the early 1980s? The compact disc was brand new, the Walkman was still a novelty and Japanese carmakers were getting ready to conquer the world.
Fast forward to 2009 and with Asia’s biggest economy in a deep recession, Japanese factories are slashing their output back down to the same levels as 1983, wiping out more than two decades of growth, analysts say.
Once seen as relatively immune to the global downturn, Japan’s economy has become one of the biggest victims, exposing the fragility of its export-led recovery from a decade-long slump.
Japan’s banks managed to escape the worst of the financial crisis, but its manufacturers are being battered by the slump in demand for cars, electronics and other goods.
“The dire situation for Japan’s economy cannot be overstated,” warned Kirby Daley, a senior strategist at Newedge Group in Hong Kong.
“Japan is woefully unprepared to deal with the severe downturn in its economy that it’s going to face in 2009, 2010 and possibly beyond,” he said.
Corporate icons such as Toyota and Sony are slashing thousands of jobs as they brace to fall deep into loss. The government is in disarray. It’s no wonder the yen’s surge against the dollar has fizzled out.
“The yen is rapidly losing its ‘safe haven’ status,” said NAB Capital analyst John Kyriakopoulos.
The government warned last week Japan’s economy was in the deepest crisis since World War II, after contracting at an annualised pace of 12.7 percent in the fourth quarter, the worst performance in almost 35 years.
“In the space of a few months, Japan has gone from being what market participants regarded as one of the world’s best economies to one of the worst,” analysts at RBS Securities wrote in a note.
“The global collapse of exports and Japan’s dependence on them are largely responsible for this change,” they added.
Japan’s Nikkei index is back down near October’s 26-year low, while the broader Topix index ended Friday at the weakest level in a quarter of a century.
With exports and industrial output plunging, analysts expect another severe contraction in the Japanese economy in the first quarter of 2009.
According to the government’s forecasts, by February Japanese factory production is expected to drop to levels last seen in 1983.
“Output will have fallen over a five-month period by as much as it had risen in the previous quarter of a century,” said Richard Jerram, chief Japan economist at Macquarie Securities.
Now more than ever, analysts say, Japan needs a steady hand on the tiller of the economy. Instead, the government is engulfed in its own crisis, with Prime Minister Taro Aso’s popularity below 10 percent according to one poll.
It hardly helps that the finance minister had to resign in disgrace after slurring his words and struggling to stay awake at a recent G7 meeting, despite his insistence that cold medicine — and not alcohol — was to blame.
Japan’s political turmoil could weaken the government’s ability to implement fiscal stimulus measures to help revive economic growth, NAB Capital’s Kyriakopoulos said.
Japan has announced a series of spending packages, but its huge public debts — a hangover from efforts to spend its way out of the 1990s recession — mean that it has limited ammunition to fight the crisis.
“They’re going to have to print money for anything that they do. They can try to throw money at the problem but they will only exacerbate the long-term issues facing the country and the economy,” said Daley at Newedge Group.
Japan’s central bank has already slashed interest rates to 0.1 percent and taken steps to spur lending, including purchases of corporate bonds, but many analysts think it will have to do more to stop the economy’s slide.
The BoJ appears to be “sticking to a fine Japanese tradition of doing too little too late,” said Rabobank International analyst Jan Lambregts.
“The measures taken over the past couple of months appear too much piecemeal. Given the severity of the recession, this is a risky approach.”
