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Economic Prospects of 2011

Rizaburo Nezu
Senior Executive Fellow

January 31, 2011 (Monday)

When surveying the economic prospects of 2011, there are four things that one must think about: exchange rates, companies shifting overseas, domestic demand, and the status of the Asian economy. At present, Fujitsu Research Institute’s (FRI) real economic growth rate for 2010 was 2.4%, but I estimate it to be around 1.2% in 2011. This is because, while Japan experienced a high growth rate in 2010 in reaction to the recession of the previous year, FRI will see growth of approximately the same level as Japan’s potential growth rate in 2011.

1. Exchange Rates: Yen Depreciation to Approximately 90 Yen to the Dollar

In terms of foreign exchange rates, I personally see the yen depreciating to approximately 90 yen to the dollar. Originally, the recent appreciation of the yen was no more than a timid effort at retaining risk-free assets in the short term, when the fact of the matter is that capital will never reside for long in a country with a low growth rate and 0% interest; it will likely move to neighboring Asian countries in the not-too-distant future. Therefore, even if it happens slowly, I believe that the appreciation of the yen will be corrected. However, I also think that the tendency towards raising an uproar whenever the yen appreciates is not beneficial. Japan has almost no gap between import and export, and the import side has its own merits just as the export side does. In fact, corporate earnings for the fiscal year ending in March, 2011 have already recovered to a point one last push short of the high pre-Lehman Shock levels.

2. Companies Shifting Overseas will Increase in Durable Goods Especially

Japanese companies will shift overseas more and more. In the long term, domestic companies in any developed country inevitably tend to shift overseas; there is no developed country in the world where the ratio of the manufacturing industry with respect to the total GDP has not declined. Unique labor practices and difficulties of language have caused Japan to begin lagging behind the US and Europe in terms of shifting manufacturing overseas. However, given the recent explosive growth of many Asian countries and the stagnation of the domestic market, the number of Japanese companies shifting overseas is trending steeply upward. This trend is particularly marked in standardized mass production durable goods such as cars and home electronics, and corporate strategy is evolving expeditiously, from export to on-site production, and even to reimporting; consequently, this will affect Japan’s economic growth, employment, and trade to an even greater degree. However, regardless of increased shifting of manufacturing overseas, it will hardly come to the hollowing out of domestic industry and people being unable to earn enough money to buy even raw materials and foodstuffs. Even if production plants are shifted overseas, core parts and raw materials will continue to be provided from Japan. Unlike the US and Europe, Japan has grasped a vital point of the value chain and boast a trade surplus with respect to other Asian countries. The technological base that Japan has painstakingly built up until now will not be lost so easily.

3. Boosting Income to Encourage Domestic Demand-driven Growth

As things stand now, one cannot expect much from domestic demand. The average working person has suffered from falling wages for the past 12 years. Consequently, there is no expectation that consumer spending, which makes up 55% of the GDP, will increase. In 2010, consumption stimulation plans such as “Eco car” and “Eco points” contributed greatly to increasing consumption, but these ended with 2010, and it is all too likely that consumption will dip drastically in 2011 in reaction to the premature exhausting of demand. If there is no promise of increasing consumption within Japan, then companies are likely to reduce domestic capital spending and switch to foreign investment instead. I find the recent trend of companies saying “Japanese people have no money, so I shouldn’t bother targeting them. Let’s target the rest of Asia instead” to be rather worrying. I believe, however, that by paying wages that correspond with the level of productivity and thus boosting Japanese workers’ income, it will be possible to drive growth through domestic demand.

4. Asian Countries Experiencing Healthy Economic Growth

Asian countries will continue to grow economically without problem. China’s major events, i.e. the 2008 Beijing Olympic Games and the 2010 Shanghai World Expo, have ended, and, despite short term cooling to avoid over-investment in real estate and inflation, there will likely be no immediate and sizeable fall in growth rate. Other countries in Asia may run the risk of economic overheating, but, except Vietnam and India, they have managed to maintain current account surpluses, and we are unlikely to see another Asian financial crisis.

5. Executives Need Resolve to Take Risks and Compete Globally

In closing, I would like to say one final thing. In the past, Japanese executives were evaluated very highly around the world. For a time, Japanese management was the most popular topic in European and American business schools. These days, Japanese executives are described in negative terms only: “they have no vision”, “they aren’t decisive”, “they lack boldness”, etc.

According to Ikujiro Nonaka, Director of Fujitsu Research Institute’s Economic Research Center, Japanese executives suffer from “Is that okay?” Syndrome, i.e. they respond to proposals from their subordinates with things like “Hey, is that really okay?” He says that this causes employees to atrophy and wither and lose their will to think boldly. I feel that in order for Japan to have a future, executives must once more rouse themselves, take the initiative, take risks, and firm their resolve to battle it out in the global market.