If Lehman's fall pulled the rug out from under Japan, Dubai's coincided with a day of reckoning many in Tokyo have yet to discern, says William Pesek
Ask the Japanese why their economy plunged last year and most will blame the "Lehman shock".
A year from now, the "Dubai shock" may crop up in discussions about why Japan is shrinking anew.
Dubai's debt crisis accelerated an export-killing yen surge and showed that the world economy remains sick without an easy cure.
The collapse of Lehman Brothers Holdings and Dubai World's bust bookend Japan's recent experience quite neatly.
If Lehman's fall pulled the rug out from under Japan, Dubai's coincided with a day of reckoning many in Tokyo have yet to discern.
Japan was the first major economy to go into freefall last year, a dynamic that accelerated after Lehman's collapse that September. It also was perhaps the first to climb out of recession, growing for the past two quarters on an annualised basis.
Now, the odds favour it being the first double-dip economy. Far from being a cyclical phenomenon, this one may be secular.
You're free to read optimism into Japan's latest stimulus package.
Sure, 7.2 trillion ($111.8 billion) of fresh spending helps.
And waiving the 15 per cent tax for overseas investors on interest from corporate bonds is a step in the right direction that will attract more global demand.
The trouble is, the longer-term consequences of short-termism are catching up with Japan. And the economy is out of obvious options to restore growth in the long run.
For a decade and a half, Japan lived from fiscal hit to monetary high. It worked well while the effects lasted.
Now Japan is shackled with the largest public debt among industrialised nations and a corporate sector that's addicted to zero interest rates.
As much of the world mulls an exit strategy from massive stimulus, Japan is going the other way.
Look at how Japan has decoupled from different regions. On the one hand, it isn't hobbled by the financial-system problems undermining the United States and Europe - and should be recovering.
But it can't latch on to the benefits of solid growth in China and the rest of East Asia.
A mature economy with an ageing population that lives and dies by exports has no choice but to go backward in this global environment. A weak return on capital and a strong yen is prompting manufacturers to cut costs. That means lower salaries, fewer jobs and, in turn, more deflation.
How did Japan get here? Look no further than Japan Airlines, which is becoming even more of a zombie company as we speak, and Japan Post.
Debt-laden JAL, which may be getting a public loan guarantee of as much as 700 billion, lives from bailout to bailout.
Japan Post was supposed to have been privatised, getting the nation's largest pool of savings away from politicians' pet projects. Neither JAL nor the postal system has incentives to become more competitive or profitable. They are a microcosm of what ails the entire economy.
Constant handouts to the private sector breed complacency. We tend to focus on the public debt, which is almost 200 per cent of gross domestic product. An equally big problem is how unproductive Japan is amid the rise of China, India and South Korea.
The global crisis caused a shift away from top-end products to cheaper Asian goods. But this is not a typical cycle. It's time for a rethink of the nation's entire industrial system.
The process won't take months, but years. The sooner we get on with it, the less susceptible the second-biggest economy will be to the Lehmans and Dubais of the world.
- BLOOMBERG
