Tokyo index spike hides Japan's true problems
June 2, 2009
 By William Pesek
Japan is booming, hot , going places, an oasis from the global crisis. One might be excused for believing that is true with a cursory look at the stock market. The Nikkei 225 stock average has jumped 30 percent in the past three monthe alone. that might be fine if not for a deepening recession and the steady return of the deflation that Japan though it had finally defeated.
Bubble, anyone? Well, yes. Analysts predicting a big earnings rebound late this year or next year are ignoring an underlying economy that is contracting at a record pace. Things in Asia's biggest economy will worsen before the "green shoots" supposedly sprouting around the globe take root there.
There are some positive signs that are engendering a false sense of optimism.
Japan's industrial output rose 5.2 percent in April, the most in 56 years. Some economists took that as evidence the world recession was easing. And then there was last week's victory by Steel Partners.
The fund run by US investor Warren Lichtenstein won shareholder support to install a new board at Aderans Holdings, blocking a rival bid for control of Japan's largest wig maker. It was a rare win for shareholder activism.
The bigger picture is far less comforting. Never mind long-term crises such as debt and demographics, neither of which is remotely being addressed at the moment. Consider a shorter-term problem: price trends.
Consumer prices, excluding fresh food, declined for a second month in April. The 0.1 percent drop was modest, yet it fitted with other evidence that weak global demand was chipping away at household and business confidence.
Tokyo-based analysts such as Takashi Nishimura of Mitsubishi UFJ Securities are not exaggerating when they say "this is the beginning of the deflationary period in Japan".
Actually, an argument can be made that Japan never defeated deflation, regardless of the spin coming from the government and the Bank of Japan (BOJ). It took record increases in food and energy last year for the country to register modest inflation.
The price pressures that did bubble up were more about the global economy than anything that Japanese policy makers did.
The Bank of Japan's "quantitative easing" policies, the ones now being employed by the US Federal Reserve, helped stabilise the economy. What they did not do was repair Japan's malfunctioning credit system.
No matter how many yen the Bank of Japan prints, there is little demand for borrowing and negligible interest in lending.
"Japan is facing the same problem as during the first half of the decade, when nominal interest rates hit zero, but this was still too high," says Richard Jerram, the chief Japan economist at Macquarie Securities. "This is again the situation."
The return of mild deflation is not a surprise. Core prices will slide 1.5 percent this fiscal year and 1 percent in the next, the Bank of Japan's policy board forecast last month.
This year marks the 20th anniversary of the beginning of the end of Japan's bubble economy. It was in December 1989 that the Nikkei reached its record of almost 39 000.
Now that the world economy is in recession, Japan's economic playbook is no longer of use.
The Nikkei is now at 9 522 points, a shadow of its 1989 high. And deflation is returning. If you see that as a reason to buy Japanese stocks, I wish you the best of luck.
William Pesek is a Bloomberg columnist
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