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Monday, April 26, 2010

JAPANESE PERSPECTIVES

Japanese opt to shun risk as fiscal dangers, global turmoil rise


Special to The Japan Times

Share prices are picking up worldwide amid a growing sense that the global economy has finally hit bottom. However, we see no big change in the conservative ways Japanese households are managing their assets, which are mainly savings accounts.

The recent jumps in share prices in Japan are largely attributable to nonresident investors. Why? At a time when the public is scrutinizing the benefits of the Democratic Party of Japan's child-care allowances, there are several factors that explain why Japanese households aren't changing the way they manage their money.

The first is that the aftershocks from the collapse of the late 1980s bubble economy and the 2008 Lehman Brothers shock are still reverberating, reinforcing the traditionally conservative behavior of Japanese households. Although many households have invested some of their long-term holdings in stocks, they still have bitter memories of the two stock market crashes, and day trading — the online phenomena that empowered individual investors — hasn't been able to fully recover since the Livedoor shock.

The second factor is that fear of unemployment continues to haunt the economy. Joblessness among the younger generation remains particularly severe: A joint survey by the health and education ministries said that only 80 percent of university graduates had secured employment promises as of March 1. No official data had been released on the situation as of April 1, but estimates put the figure at under 90 percent this year, meaning one in 10 graduates lacked job prospects upon leaving school.

The employed have their own problems. Wages after tax and social security deductions are still shrinking and pay hikes are not on the horizon, if the outcome of this year's labor-management talks are any indication. It's no wonder households remain risk-averse when managing their money.

The Greek debt problem meanwhile adds a third element. Greece, while creating a drag on the EU economy as a whole, is highlighting the risk of Japan's huge public-sector debt. It is now obvious that the reductions in wasteful government spending promised by the DPJ won't be enough to cover the shortfall in tax revenue, and some overseas ratings agencies have been hinting that they might downgrade Japanese government bond ratings.

A fourth element is that the public has become cautious about investing in foreign currencies. They are being reminded that gains from betting on the interest rate differentials between Japan and other countries can be instantly wiped out by fluctuations in exchange rates. According to recent data, the value of foreign currency-denominated investment trusts has declined to roughly 70 percent of its peak of ¥67.1 trillion achieved in October 2007.

Following recent talks between China and the United States, speculation is growing that China's currency, the yuan, may soon appreciate. Speculation that the yen might go along for the ride have pushed investors to be even more cautious. On the other hand, expectations for a higher yen appear to be one of the factors driving nonresident investors to buy Japanese shares.

A fifth factor is being provided by Japan's old nemesis, deflation, and the government's own admissions that prices are likely to keep falling. This means that under current conditions, throwing your money into a bank remains one of the best "high return, low risk" ways to manage your funds. This is because that, even though interest rates are still near zero, falling prices will increase your purchasing power. In other words, there is no need to engage in financial transactions that will increase your risk.

People are of course aware of the risk that banks might collapse. Coupled with the government's review of Japan Post's banking operations, financial institutions — particularly small local banks — face tough times ahead. But people also know they have the final say over which banks to use, and there is a growing sense that using guaranteed bank deposits is safer than investing in government bonds that are increasingly at risk of being downgraded.

As has been pointed out by the the Organization for Economic Cooperation and Development, Japan's fiscal deficits are not cyclical but structural in nature. We need to closely monitor how the DPJ intends to restrain the nation's swelling budget deficits.

Teruhiko Mano is chairman of the Mano Economic Intelligence Forum.


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