Japan stares into 'economic abyss'

By John Sudworth
BBC News, Tokyo

It was one of the worst weeks in the history of the Japanese stock market.

At the end of it, the talk in Tokyo financial circles was of "total capitulation" and of a mood gone "well beyond panic".

Share prices collapsed in a tailspin of selling and the benchmark Nikkei index lost almost a quarter of its value in the space of three days.

Burned investors, pondering their share of the $400bn (£235bn) that has just evaporated, can spend this week's Monday market holiday groaning to themselves in darkened rooms.

But the wary Japanese public might also be doing some hard thinking about what it all means for them.

There are ominous signs.

"Already I think we are looking into the abyss of a global recession and there are signs in Japan that this is already happening"
Prof Noriko Hama
Doshisha Business School

In the past six months, Toyota Motor Corp is reported to have cut 2,000 temporary factory jobs.

And this week 1,000 nervous employees at the bankrupt Yamato Life Insurance are wondering about their future.

Both cases are powerful illustrations of how the global credit crunch is already affecting the profitability of real businesses and the livelihoods of real people everywhere.

If somewhat oversimplified, it is now a well-rehearsed chain of cause and effect:

• Risky American mortgages cause American banks to go bust
• Surviving banks stop lending to each other and credit dries up
  
• American consumers cannot afford, or cannot find, the loans to buy Japanese cars
  
• Japanese workers, like those at Toyota, lose their jobs
  
• Japanese investors concerned about a recession, and foreign investors trying to cover their debts, sell their shares
• The stock market collapses and companies, like Yamato, suffer dramatic falls in their value and go bust.

On Friday, the Japanese Prime Minister Taro Aso joined the dots for anyone in any doubt about the connection between the financial whirlwind and storm damage in the real economy.

"Share prices have fallen to the level where they can hurt the ability of companies to raise funds," he said.

Weather-proof?

The Asian economies, and Japan in particular, were meant to be more weatherproof than their Western counterparts.

The banks here have very little exposure to the bad mortgage debt that started the crisis elsewhere, and Japanese companies have low levels of corporate debt.

In fact some analysts believe that investors should be buying stocks, not panic selling.

"Export-led Japan cannot be immune from a crisis abroad," Naomi Fink, Japan analyst at the Bank of Tokyo-Mitsubishi UFJ, tells me.

"But consumption is 60% of the economy here, and even though it is soft, it doesn't show signs of decreasing rapidly."

But when everybody else is rushing for the exit, even the most bullish of shareholders are eventually forced to throw up their hands and join the stampede.

Contagion

Confidence is in short supply and, besides, the herd of panicking investors has real fears of a global economic slowdown, and the deadly contagion of the credit freeze.

"Small and medium sized companies are having real problems getting access to credit," says Martin Schulz, senior economist at the Fujitsu Research Institute.

"Production is tanking."

Japanese machinery orders, a key measure of capital spending, slumped by 14.5% in August, and corporate bankruptcies are on the rise.

Prof Noriko Hama from the Doshisha Business School is certain that the timing of this gloomy news is no coincidence.

"I think the linkage between the real economy and the financial crisis is becoming clearer by the day," she says.

"Already I think we are looking into the abyss of a global recession and there are signs in Japan that this is already happening."

If Japan is an innocent bystander caught up in someone else's crisis, it is also a strong proponent of collective action to limit the damage.

Prime Minister Aso has said he would be ready to host a crisis summit of G8 leaders of the leading industrialised nations.

'Lost decade'

And Japan may have valuable lessons to share with the world about the dangers of a lack of appropriate action.

The country suffered its own banking crisis after its ballooning property bubble burst in 1990.

Economists believe it did not act quickly enough to recapitalise banks and get credit flowing again, resulting in a "lost decade" of economic stagnation.

Some of those still sleeping rough on the steps of Tokyo station will testify that financial crises do not just affect the rarefied world of hedge fund managers and corporate bankers.

Once again Japanese people are pondering a dizzying fall in the stock value of their major companies and wondering what new pain it will bring.