On the money: Central planner Asian states show New Zealand how not to do it

By Michael Coote

Friday 7th June 2002

Just as confidence has started to waver over American economic recovery, it seems that commentators are turning sweet on Japan.

Not that Japan has done much that is startling to reform its economy of late, although its banks have recently booked huge losses on sour loans, in theory going some way toward cleaning up their books and returning to financial rehabilitation. Non-bank corporations have also unveiled spectacular losses.

The banks have weathered the admission of bad debts and changes to government indemnity of private savings better than predicted. Whether the last of huge swaths of dud loans being admitted to by Japanese banks has been seen yet is a moot point.

The Economist has repeatedly mentioned reluctance by banks to be completely brutal in loan reclassification, preferring as much as possible to classify as recoverable loans that are a long shot for repayment.

Much of these loans is tied up in property lending where the value of the assets has plummeted, not to mention difficulties for mortgagee sale buyers in repossessing their buildings where the yakuza - Japan's gangster organisations - happen to be tenants. Such tenants tend to be stubborn occupiers and it is difficult to find anyone enthusiastic about moving them on. Golf courses have proven to be another black hole for bank loans.

The Japanese sharemarket has picked up nonetheless on the belief that the worst has happened and can be consigned to history. Many fund managers are underweighting Japan and have some catching up to do on investing.

Adding to temptation is US dollar weakness with the promise of yen-value escalation in Japanese assets.

Concern about the impact of a higher yen on Japanese exports may be overdone. More important to corporate profitability may be a reduction in import costs and the pivotal role of Japanese consumers.

According to Global Asset Management's (GAM) Pacific team fund manager, Lesley Lathe, Japan is well-placed for a cyclical upturn. He claims in recently published GAM notes that the normal Japanese economic cycle plays out over 34 months on average and that consumer demand lifts about 18 to 20 months after the bottom of the inventory cycle.

The last economic cycle was squashed 19 months along the way by the tech wreck, but he believes that the present cycle unfolding "is the first one that looks to me, excluding negative external events, as if it could turn out to be a reasonably normal cycle in which consumption will improve at a time when the [share]market is not desperately overvalued."

If Mr Lathe is right, a punt on Japanese stocks might pay off but probably only as a short-term cyclical play. Many of the Japanese economy's faults are still in place.

Reformist Prime Minister Junichiro Koizumi has been weakened politically by falling popularity with voters and lack of support within the Parliamentary wing of the Liberal Democratic Party. The will to reform may be blunted by economic rebound, with the hand of those who have held out for the status quo coming right in the end being strengthened as a result. Japan may simply postpone its day of reckoning.

One economy often held up as a model for New Zealand is taking a different tack from Japan's reluctance to change. Singapore has been hit severely by the tech wreck, its bold move into IT exports now looking not so wise in retrospect.

Like Japan, Singapore has a substantial problem in maintaining domestic manufacturing in a high wage economy. It is also losing port business to cheaper Malaysia.

New Zealand may have less to gain than previously thought by copying Singapore's central planning approach to picking winning industries. Had we been heavily dependent on IT for export earnings as many have recommended, we could have experienced slump rather than growth during the trade downturn.

However, our country stands to be hit by its own lack of export diversification if it undergoes major decline in terms of trade for our dominant primary sector.

The lesson learned, which Singapore is trying to apply, is that export market development needs to be widely diversified across industrial sectors and appropriate to domestic capital allocation priorities. It can be a mistake for governments to hothouse fashionable industries.

Far better to let the private sector take on the risk of picking losers as well as winners. And the Singaporeans were being pretty realistic with their central planning: on his last official visit to New Zealand Senior Minister Lee Kuan Yew stated that Singapore expected two out of three hothoused business ventures in high tech would fail.

High-wage countries like Japan and Singapore should progressively exit manufacturing in favour of service-based industries, although blue-collar shipbuilding still remains a strength of the Singaporean economy and social dislocation is threatened by loss of manufacturing jobs to workers not necessarily suitable to service industry employment.

Ironically, the Singaporean authorities are now centrally planning for a future in which Singaporeans make free business decisions for themselves in conjunction with accelerated government withdrawal from business sectors.

Adding to that irony is that our ruling social democrats, by contrast, seem to be headed in the opposite direction.

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