It’s a questionable idea perhaps to draw too much from popular culture – but the new Tom Cruise movie, ‘The Last Samurai’, could be symptomatic of the broader economic picture.
The movie’s release comes at a time which has seen the Bank of Japan post its first financial loss for 30 years, of $1bn (E819m), and when the yen is at three-year highs against the US currency. And there are faint glimmers of growth on the horizon.
‘The Last Samurai’ sees US army officer Cruise move to Japan and grow to take on the ideals of the Samurai cult – eventually taking arms against the modernising forces within the society. While not as simplistic as US muscle coming to the rescue of Japan, the film may signify a newfound regard by the US for its ally and trading partner across the Pacific. At the very least it demonstrates a greater realisation by the US of its historically close ties with Japan.
As Deutsche Bank says: “Japan is back in vogue”. In a recent report entitled ‘Japan – pain postponed’, Deutsche Bank Research notes: “This year’s strong GDP growth and rising equity markets should not be mistaken for signs of a genuine turnaround of the world’s second-largest economy.” The bank warns: “The necessary painful adjustment has been postponed again.” Despite a short-term economic rebound, “economy-wide returns are approaching 0% as the economy is incapable of generating nominal growth”.
Deutsche points out that Japanese banks have not reported profits since 1994 – and that 70% of companies did not make profits in 2002. The Bank of Japan, with interest rates stuck at 0% for four years now, “is running out of ammunition”. The prognosis? “Mild deflation is set to persist.”
Tied up with the economic situation is what Deutsche terms a “painfully slow” reform process, even though the Koizumi government understands what needs to be done.
“1 change would imply that Japan finally bites the bullet and allows unprofitable firms to exit, excess capacity to shrink, productivity to rise, and more new companies to emerge,” the bank observes. “This painful and risky adjustment is the prerequisite for the price level to stop falling eventually. The alternative is a continuing slow erosion of Japan’s economy.”
Katie Pybus, strategy analyst at Henderson Global Investors, points out that the Japanese economy grew at an annualised rate of 2.2% in the third quarter of this year – well above economists’ expectations. “As in Europe it was exports that were an important driver of this number with little sign of life in the consumption sector.
“We remain positive on Japan,” Pybus adds. “The economic fundamentals are strong and improving. A crucial support for the Japanese equity market this year has been the very high level of purchases by overseas investors.
“If the global recovery is to be sustained there has to be an improvement in the domestic side of both these economies as the weakness of the dollar has the potential to damage the exporters.” For all that, Japan’s equities market fell nearly 10% in the first two weeks of November. The Nikkei 225 index is hovering around the 10,000 mark.
As Citigroup Capital Markets’ Jeffrey Young observes: “With global demand accelerating, and policy actions steadying the banking system, Japan’s cyclical prospects have improved. In addition, structural reforms appear to have halted the trend slowdown in productivity.”
But he says that the measured real growth in gross domestic product “probably overstates output gains significantly”. That is to say there is a statistical fudge going on.
Young adds: “External developments are the primary driver of Japan’s upturn. Japan’s deepening trade links with Asia – the destination of nearly half of this year’s exports – represent a major positive factor.” He means China.
Finance Minister Sadakazu Tanigaki and Bank of Japan Governor Toshihiko Fukui have both said that they are concerned that a swift rise in the value of the yen - which would hit exporters - will hurt the economy as it attempts to come out of a 12-year slump.
Higher profits have nurtured a moderate expansion in business investment, Young said – thought consumption has fallen despite an improvement in the labour market. “The yen’s rise is also a dampener, but global demand looks firm enough to compensate for he currency effects.” He concludes: “Japan’s long-run prospects remain dim.”
Young’s colleague Kermit Schoenholtz sums it up. “Our forecasts for economic growth in Japan are not strong enough to anticipate a surge in long-term interest rates, while the government remains inclined toward fiscal restraint.”
The Bank of Japan itself notes: “Economic activity still continues to be virtually flat as a whole, although signs of improvement have been observed in such areas as the environment for exports. With regard to final demand, business fixed investment is recovering gradually.
“Meanwhile, private consumption continues to be weak, housing investment remains sluggish, and public investment is declining. Net exports are virtually flat. Industrial production continues to be basically level in response to these developments in final demand, and corporate profits are on a moderate uptrend.”
Another factor for Japan-watchers to keep tabs on – China. Japan’s neighbour is finally beginning to stir. The Asian Development Bank says China – Asia’s second largest economy – will probably grow 8.5% in the 2004 fiscal year. That would make it Asia’s fastest growing economy.
In the final analysis it all comes down to a single thought. Just how credible is the Japan growth story? Probably about as credible as Tom Cruise becoming a Samurai.

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