Lessons from East Asia’s bubbles

Asia’s economy faces serious challenges, with rising levels of debt and disruption to established networks having a negative impact on the region’s economic growth. But as Duncan Bartlett reports from Tokyo, from some perspectives, Japan appears to be as energetic and ambitious as ever

Visitors to Tokyo are able to climb a new skyscraper to gain a fresh perspective on one of the city’s most famous landmarks, a bustling pedestrian crossing known as ‘the Scramble’.

From the observation deck on the 45th floor of the Neo Tower in Shibuya, tourists can look down on people scurrying across the streets below, like ants. Since it opened at the end of October, shops on the tower’s lower floors have been doing brisk business. From early morning to late at night, they are crowded with people buying luxury goods, such as banana-flavoured cakes. The designers say the building aims ‘to embody the future of a dynamic, international and ever-changing city’. It is a clear sign of their confidence in Tokyo’s future.

Yet such building projects are notoriously expensive and depend on borrowed money. And those who have studied Japan’s recent history will know that excessive borrowing creates risk.

Risk factor

In the early 1990s, the world looked on in awe at the property boom in Japan, when Tokyo’s skyscrapers symbolised a seemingly unstoppable Asian economic powerhouse. But when the property and stock market bubbles burst, Japan entered a prolonged period of economic strife, marked by decades of weak growth and spells of recession.

The trouble is far from over. The International Monetary Fund says Japan’s growth is expected to slow from 0.9 per cent this year to 0.5 per cent next year, partly due to the impact of a sales tax hike. The IMF has also warned that low interest rates are encouraging companies to take on levels of debt which could become a serious liability in the event of another recession.

It says that almost 40 per cent of the world’s corporate debt is held in eight countries – including the United States, China and Japan. If there is a serious downturn in the global economy, as there was a decade ago, repayments could become extremely troublesome.

China worries

Concerns about the situation in China are particularly acute, given the difficulties in assessing its true level of government and corporate debt. This issue was on the minds of experts at November’s FT Commodities Tokyo Summit, organised by the Financial Times.

The newspaper’s Chief Economic Commentator, Martin Wolf, said that the Chinese authorities have noted the Japanese experience and are keen to avoid a property bubble, followed by an economic slump.

China’s outstanding debt hovers around $35 trillion and, as a share of GDP, it is among the highest in the world. But Mr Wolf noted that the pace at which the debt is accumulating has slowed in the past few years, partly because, since 2017, the administration of Xi Jinping has been aiming to mitigate the risks posed by unsustainable loans, offered through non-official channels.

‘A lot of money which China has invested has been wasted,’ claimed Mr Wolf, adding that he often meets Chinese experts who express anxiety about the sustainability of economic growth.

Japanese companies are ‘watching developments carefully’ in China

‘It’s pretty clear that the Chinese economy has slowed dramatically from the heady days of ten percent growth, marking a downturn which is almost certainly much more severe than the numbers which are officially recorded,’ he said.

Watching carefully

The IMF projects China’s growth to slow to 5.8 per cent in 2020 from 6.1 per cent this year, falling below the 6 per cent target set by Beijing. This is significant for the whole of Asia, as China is the main trading partner for most countries in the region and is the biggest destination for Japanese exports.

Toshitaka Sekine from the Bank of Japan told the FT conference that Japanese companies are ‘watching developments carefully’ in China and are particularly concerned about the impact of the trade war with the United States. Nevertheless, he said so far the Japanese have not fundamentally changed their approach towards China.

(L to r) FT reporters Robin Harding and Martin Wolf with Toshitaka Sekine from the Bank of Japan and Kikuko Takeda from the IIMA at the FT Commodities Tokyo Summit
(L to r) FT reporters Robin Harding and Martin Wolf with Toshitaka Sekine from the Bank of Japan and Kikuko Takeda from the IIMA at the FT Commodities Tokyo Summit

Looking at the global situation, Mr Sekine noted that companies around the world are postponing capital investment. This impacts many of the major Japanese firms which supply multinational companies with goods and services. For example, Panasonic recently reported a sharp fall in its sales of electronic components to factory owners.

Korea tension

The US-China trade dispute is not the only concern for Japan. There is also worry about another trade spat, linked to a diplomatic row with South Korea over the legacy of the Second World War.

Japan’s Economy Minister, Yasutoshi Nishimura, told reporters that this has had ‘a big impact’ and is one of the key factors holding back economic growth. ‘Exports will remain weak, due to slack demand for cars and electronics parts,’ he warned.‘In addition, declines in tourists from South Korea are having a large negative effect.’

The Japanese government usually responds to faltering growth with attempts to stimulate the economy. It encourages investment in big infrastructure projects and is presently awarding contracts to firms which offer to repair damage caused by powerful cyclones such asTyphoon Hagibis, which recently caused devastation when it hit the Kantō region of Japan.

This approach to spending is one of the so-called ‘arrows’ of Prime Minister Shinzo Abe’s policy of ‘Abenomics’, which is designed to put an end to deflation and boost economic growth. Yet successive waves of spending have brought diminishing returns. They have also pushed Japan’s government debt to record levels. The Bank of Japan enables companies to borrow money at almost no cost, due to a zero interest rate policy it has been following since 1999.

At the FT Commodities Tokyo Summit, the newspaper’s Tokyo’s Bureau Chief, Robin Harding, asked the principal economist from the Institute of International Monetary Affairs, Kikuko Takeda, if Abenomics is finished.

Ms Takeda acknowledged that there are no simple answers to Japan’s economic challenges. ‘We need a lot of incremental small steps towards big solutions,’ she said, adding: ‘We can see very clearly what we need to do to help Japan thrive in the global economy. We need to help people prepare for an ageing society and we need to help businesses increase their productivity.’Many other countries in Asia have similar aims. The need for robust action is made clear in the World Economic Outlook, released by the IMF in October. It said that ‘although Asia and the Pacific is still the world’s fastest growing major region, contributing more than two-thirds of global growth, near-term prospects have deteriorated noticeably with risks skewed to the downside’.

Duncan Bartlett is the Editor of Asian Affairs and a former BBC Correspondent in Tokyo

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