Japan's economy has suffered one unfortunate turn after another. But there may also be greater forces at work than simple bad luck.
Seven months after Japan's economy was thrown into recession by the double-blow of a tsunami and the Fukushima nuclear disaster, the country now faces a whole new slew of challenges. The government is struggling to reign in the value of its currency. Company earnings have been weak across the board. Now, a major scandal is rocking 92-year-old camera-maker Olympus and reviving concerns about the country's corporate governance model.
Japan, it seems, just can't catch a break. But there may also be greater forces at work than bad luck.
Japan's troubles start with the currency. The country is Exhibit A for why, in the painful logic of global trade, it can be a serious problem if your currency is viewed as a sound investment in times of crisis. For months now, Japan's finance ministry has been in a tug-of-war with foreign exchange investors who are driving up the value of the Yen. Thanks to the country's large trade surplus, Japan's currency is widely considered a safe-haven asset, along with U.S. Treasury notes, gold, and the Swiss Franc. So as the global economy has teetered over the debt crisis in Europe and slow-growth in the America, investors have plowed their money into yen, pulling it up to an all-time high against the dollar in October. That's killer for an export economy like Japan, which relies on cheap currency to make its products attractive abroad. Meanwhile, it isn't clear if the government can pull the Yen's value back down.
When Switzerland similarly saw its currency start to spike earlier this year, the government responded by pegging it to the Euro. As Bloomberg recently pointed out, Japan's economy is 10 times the size of Switzerland's, which nixes a peg as an option. Instead, Finance Minister Jun Azumi has engaged in a series of currency interventions, which have had limited success. After reaching it's peak against the dollar, Azumi ordered the central bank to sell roughly 8 trillion Yen, about $102 billion worth. That move temporarily lowered the yen from its frightening heights, but it's still up 3.3% on the dollar over the last six months. Worse yet, traders don't seem ready to let up. Via Bloomberg:
"The yen remains one of our favorite currencies as Japan still has a strong trade surplus and benefits from the global risk aversion that we're seeing," said Vimal Gor, the Sydney- based head of income and fixed interest at BT Investment Management Ltd., where he oversees the equivalent of $13 billion, on Nov. 3. "Unilateral interventions in the Japanese currency have no real lasting impact. If anything we'd view this as a buying opportunity."Poor Earnings
Thanks in part to the currency mess, the Bank of Japan has cut its growth forecast for the rest of this year and next. But regardless of what the Yen's rise portends down the line, it's already causing fits for some Japan's biggest corporations. Like many of its manufacturers, the country's auto makers saw sales take a hit after the earthquake and tsunami disrupted their supply chains, as they were unable to move enough cars to market. Flooding in Thailand, where some of car companies have off-shored manufacturing, has now set back their recoveries. And the Yen is compounding the situation. This week Toyota announced third quarter profits were down 18% to $1 billion. Another billion in net income had been erased by exchange rates. According to the AP, the company has already begun issuing apocalyptic warnings about what the future might hold:
Toyota President Akio Toyoda said earlier this week that the strong yen was reaching levels "far beyond what is tolerable," threatening to make it necessary to move production out of Japan. He asked that the government do more to prop up the dollar, stressing that manufacturing in Japan would be "destroyed," not just hollowed out, which is the common term to describe production moving out of Japan.But not everyone thinks currency is to blame for Japan's corporate troubles. Yesterday, Reuters Columnist Wei Gu noted Deutsche Bank's finding that, on the whole, the 493 Japanese companies that announced earnings by Oct. 31 were 57% short of their forecasts. Yes, there were big, global problems cutting into their bottom lines. But the Yen has been appreciating for years, and companies have been adjusting.
The problems, Wu says, go much deeper. They're symptoms of a sclerotic corporate culture that focuses on market share and revenue instead of investor returns. That means companies hold onto businesses that expand their footprint, even if they barely add to margins. Think Panasonic's sideline making portable razors. In economic downturns, that habit leads to losses. As Wu puts it, companies need to dump their "dead wood."
Then again, business priorities might not be the biggest issue plaguing Japan's boardrooms these days. This week brought revelations of a major accounting scandal at Olympus, where high level executives hid securities losses for decades through M&A deals. The shady transactions were brought to light by former CEO Michael Woodford, who was fired last month after raising questions about more than a billion dollars spent on such deals. According to the Wall Street Journal, the Olympus scandal is dredging up unpleasant memories of an old Japanese corporate practice known as Tobashi, where companies sold soured assets to dummy companies to get them off their books. In 1997, it led to the massive collapse of Yamaichi Securities Company, then the country's fourth largest brokerage.
But Olympus' troubles may also be shining light on contemporary problems with Japan's business culture. A writer for Forbes pointed out that Japan is known for having a serious deficit of corporate accountability, thanks to a lack of independent directors on company boards. Writing for Time Magazine, Bill Powell argued that the "Olympus Scandal shows that local boardrooms can still be secretive, deceitful and perhaps even criminal. Those, alas, are still Japan's rules of capitalism" The world's third biggest economy has been having a rough run. And from what it appears, it may take more than better luck to turn it around.