Given the mid-term election results in the US and the apparent rise of the Democratic party, are you worried about the possibility of increasing economic protectionism harming Japanese interests?
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"Japan’s companies had better make use of the advantage of being in the Asian region. The urgent task for them is to promote localization in Asia, in order to secure from European and American firms the fruits that this prospering economy brings forth" Eisuke Sakakibara |
I don’t expect any drastic changes. After the US mid-term elections, in fact, president Bush spoke to senior management at the Big Three [the three major US automobile manufacturers] but did not agree with their central complaint that the yen rate is kept artificially low against the dollar and is thus supporting the business of the Japanese auto manufacturers.
The current low yen rate is market-driven. There is no reason for Japan to be criticized for any artificial operation on our side, since it was 2003 when the Bank of Japan last intervened in the market. The yen rate is low also against the euro, the Canadian dollar and the Asian currencies.
The biggest reason for the yen rate is the domestic interest rate, which cannot be lowered any further. The zero-interest-rate policy has actually been lifted in Japan, whereas the US is expected to lower its interest rate. So the gap between the US and the Japan rates will gradually narrow. The same can be said for the interest rate gap between Europe and Asia, so I think it’s highly probable that the yen will tend to appreciate against other currencies in 2007. It is also worth noting that countries are now increasingly reducing the ratio of US dollars in their foreign reserves. They are mainly switching to euros, and this trend should be watched carefully as a possible threat to the dollar in the mid and long term.
Where does that leave Japanese companies, which have been performing well thanks to the weak yen?
The robust business performance of Japanese firms is most represented by manufacturers. Strong growth in such sectors as steel, marine transportation and machinery gives an impression of full-scale economic recovery in Japan. Foreign countries, importantly, are also beginning to take a favourable view of Japan after being somewhat pessimistic in recent years.
However, corporate performance in Japan has now improved for four consecutive years and that might suggest we are close to the end of an economic cycle. The US economy is expected to experience moderate slowdown throughout the first half of 2007, and the world economic growth rate for 2007 is forecast to be around 1% to 2%. The slowdown of the economy in the US or China will be more apparent than in 2006, so the impressive recent performance of Japanese firms backed mainly by exports to the US and China is going to hit its first peak.
A greater number of foreign financial institutions are expanding their businesses in the Japanese market, and are starting to look very competitive. The Japanese financial industry has seemingly turned the corner of its bad debt problems, and the top three major banks have finished repaying public debt. What’s their next move?
Foreign financial institutions increased their presence in the Japanese financial industry after the bubble burst. From now on, I believe that domestic mega-banks will start fighting back. The main area for competition will be the investment banking business, where potential profits are high. The Japanese mega-banks and major Japanese broker houses seem desperate to secure foreign talent for their investment banking businesses.
I feel that the key for the domestic mega-banks to make a great leap forward is the foreign market. In particular, their success should depend on how much of the Asian markets such as China and India they can secure.
The economic growth of China and India in particular has been spectacular, and Japanese companies are looking to take advantage. What do they need to do to compete?
Deng Xiaoping, the de facto leader of China in the 1970s, led the liberalization of the economy. China achieved high-level economic growth by inducing investment first from overseas Chinese capital, and then from Japan, Europe and the US.
In India, market liberalization started much later, in the 1990s. It was fortunate that this market liberalization coincided with the global IT revolution. If the Indian economy had been too heavily controlled at the time of the IT revolution, all the Indian IT firms would have been nationalized and we would never have seen such impressive growth in that sector.
While the economy and the financial sectors of China and India maintain close relationships with the US and Europe, concerns about biased partnerships seem to exist. China’s stance against foreign financial companies has changed dramatically in the past few years: the country is now promoting an open-door policy. This change in its policy seems to reflect China’s intention of nurturing partnerships with economies other than the US and Europe. That is Japan’s opportunity.
The financial market in India is also dominated by global financial groups from the US and Europe. However, as with China, opportunities exist also for the Japanese financial firms to enter the market.