Japan's Leaders Powerless as Economy Plunges

A YouTube video of Japanese Finance Minister Shoichi Nakagawa is highlighting the government's impotence in dealing with collapsing exports and the rising yen

By Ian Rowley

A slurring, muddled performance by Japanese Finance Minister Shoichi Nakagawa at the Group of Seven meeting in Rome over the weekend is attracting plenty of attention in Japan. At a news conference on Feb. 14, the minister, an ally of Prime Minister Taro Aso, appeared to be drunk: He misunderstood questions, his speech was unclear, and at one point he even appeared to almost drift off to sleep. A day later, back in Tokyo, Nakagawa explained that he had been suffering from a cold and reacted badly to medicine. "I wouldn't drink before a G7 meeting," he told reporters outside his home, sniffling. (Update: On Feb. 17, Nakagawa nevertheless announced he would resign.)

Explaining away Japan's dreadful economic performance is likely to prove rather more challenging. Stung by collapsing exports, a surging Japanese yen, and ineffective government, Japan's Cabinet Office today announced that Japan's gross domestic product slumped at an astonishing annualized rate of 12.7% between October and December. The fall is more than most Tokyo economists expected and marked the biggest quarterly slump since 1974. "There's no doubt that the economy is in its worst state in the postwar period," Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo.

For the quarter ended Dec. 31, Japan's economy declined 3.3% compared to the previous three months. That's worse than U.S. and Europe, which posted declines of 1% and 1.5% respectively. The outlook for the current quarter is only marginally better. Barclays Capital projects Japan's GDP will slip at annualized rate of 9.6% between January and March, although the pace of decline will at least slow after that as government stimulus packages, especially in the U.S. and China, boost demand for Japanese goods.

Exports in a Free Fall

As the government says, external events are having a massive impact on Japan's economy, which until November 2007 was experiencing its longest period of expansion since World War II. In particular, as the slump in demand for Japanese autos and electronics products has spread from the U.S. and Europe to China and other previously fast-growing markets, exports have collapsed at a unprecedented pace, falling 13.6% compared to the previous quarter in the three months through December. Making matters worse is that the Japanese yen has soared against rival currencies. In 2008, the yen gained 20% against the dollar and even more against the euro and other currencies, further gnawing into exporter competitiveness.

That's causing Japanese companies to take drastic action. Last week, Pioneer and Nissan (NSANY) said they would cut 10,000 and 20,000 employees, respectively. Toyota (TM), like many Japanese companies, is shedding thousands of contract workers and said on Feb. 6 it would show its first loss since 1950. "We're facing a once-in-a-hundred-years crisis," Akio Toyoda, who will take over as the company's president in June, said last month. Toyota is also trimming U.S. labor costs.

But why should Japan's economy be plunging at twice or more the pace of the U.S. or the euro zone? After all, a year ago there was still confidence that Japan's economy was relatively well-positioned to weather the economic crisis that started with the onset of the subprime crisis in the U.S.