Oil spike lubricates Japan's economyTOKYO - The conventional wisdom is that spikes in crude-oil prices play havoc with heavily resource-poor Japan, which is the world's third-largest oil guzzler after the United States and China and imports almost all its oil. To be sure, high oil prices remain a potential scourge for the Japanese economy just as they are for other oil-consuming countries.
But oil-price rises have proved to be rather a boon - at least so far - for the world's second-largest economy. Despite high crude prices, the Japanese economy has been barreling ahead toward a full-fledged recovery amid rising exports and firm domestic consumption, with the stock market reviving and many corporations earning record profits.
Concerns over Japanese financial institutions have eased significantly as the once-huge mountains of bad loans by banks have returned to normal levels. Major companies have cleared up their excess debts, equipment and labor, which had weighed on their fortunes, and are expected to log record profits for the current fiscal year ending in March. A spate of data released recently reinforced the view that Japan has finally emerged from a decade of stagnation that ensued after the "bubble economy" of the late 1980s - characterized by inflated prices of stocks and land - burst in the early 1990s.
Industrial output posted the highest level in 2005 since 2000, with the December figure rising for the fifth straight month after seasonal adjustments. Unemployment declined for the third year in a row in 2005, to 4.4% from 4.7% in 2004, with the December figure down 0.2 percentage point from November's 4.6%. In December, the number of job offers and job seekers matched for the first time in more than 13 years.
Amid the improving job environment, Japanese consumers are loosing their purse strings. The consumption propensity of wage-earning households, which is measured by the ratio of household spending to disposal income, registered the highest level in 15 years, at 74.7%, in 2005.
The average stock price on the Tokyo Stock Exchange rose by about 40% in 2005. Toward the end of the year, it topped the 16,000 level for the first time in more than five years. Japanese stock prices have weathered the "Livedoor shock" that hit the country in mid-January. By the end of last month, the benchmark Nikkei 225 index had more than recouped losses from the massive selloff triggered by the investigation into Internet startup Livedoor Co, which resulted in the arrests of high-profile president Takafumi Horie and other executives on charges of violating the Securities and Exchange Law. The Nikkei index ended at a new five-year and five-month high of 16,649.82 on January 31, enjoying a tailwind from the release of positive Japanese economic data. The Nikkei average has been hovering in the mid-16,000 range in recent days.
A key indicator for Japanese prices rose for the second straight month in December, suggesting that Japan might be close to beating deflation - a situation in which prices slide continuously, hurting growth, and thereby bringing down wages and corporate profits. The nationwide core consumer price index (CPI), which excludes volatile fresh-food prices, rose 0.1% on year in December, marking the first two-month run of price rises in almost eight years. The central Bank of Japan has shown a strong eagerness to end as early as this spring its five-year ultra-easy monetary policy under which the financial market has been flooded with extra money to encourage recovery. Interest rates have been kept at near-zero for five years under the policy.
Seven major private economic institutes estimate that Japan's gross domestic product has expanded for four quarters in a row, with their median forecast putting GDP growth rate at 1.2% in real terms from the July-September quarter, or an annualized pace of 5%. The GDP figures for the October-December quarter are to be released by the government on February 17.
Amid emerging signs of Japan nearing a victory over nasty deflation, the government projects modest economic growth of 1.9% in real terms in fiscal 2006, which starts on April 1 - 1.5% from domestic demand and 0.4% from exports. The government of Prime Minister Junichiro Koizumi also expects the CPI to register a year-on-year rise of 0.5% and the GDP deflator, which reflects general price movements, to inch up by 0.1%. Economists agree that the biggest threats to a fledgling recovery in the world's second-largest economy are external. The growth in Japanese exports, which has underpinned a nascent economic recovery, is led by shipments bound for the United States and China. If the economies of the two largest trading partners go awry, Japan would suffer severely.
Also, oil prices remain a source of concern. Crude-oil prices are stuck at high levels of about US$60 per barrel in world markets, although they remain well below the historic peak of $70 reached last year. World oil prices have stayed high - and are expected to do so throughout the year and beyond - because of structural factors that will not change overnight. Among those structural factors are sharply rising demand in Asia, led by China and India, the world's two most populous countries, as well as limited spare production capacity of the Organization of Petroleum Exporting Countries (OPEC). Oil prices are widely expected to hover in the range of $55-$60 a barrel through this year, not only because of structural factors of supply and demand but also because of concerns about the Middle East situation, insurgent attacks on oil facilities in Nigeria, and the standoff over Iran's nuclear program, among other things.
Japan relies on imports for almost all of its oil, of which about 90% now comes from the politically volatile Middle East. Inevitably, last year's spike in oil prices posed a threat to the country's economy. Another oil crisis similar to the two 1970s oil crises - the first in 1973 and the second in 1979 - would be a nightmare scenario for the country. As a result of the first oil crisis, the Japanese economy experienced its first negative growth since the end of World War II in 1974 after years of high-flying growth. Japan survived the two oil crises through strenuous energy-saving efforts and technological innovations.
While posing a continued potential risk, however, high oil prices have so far had only a limited effect on the overall Japanese economy, which is among the world's most energy-efficient. According to the International Energy Agency, Japan's energy consumption rate - energy consumption divided by GDP - for 2003 stood at 0.11 ton of oil equivalent (TOE). This figure was half the 0.22 TOE of the US and less than an eighth of China's 0.92 TOE. A stronger yen, which makes imports cheaper, also plays a significant role in fending off the negative impact of a sharp surge in oil prices. In 1980, when oil prices broke through the $40-per-barrel level, the currency traded at the 202-264-yen range against the US dollar. But the yen is now quoted at about 116-117 against the greenback.
In addition to the increased resilience of the economy to spikes in oil prices, most analysts cite the recycling of oil money from oil-producing countries into Japan in the form of increased investments in the Japanese financial markets, and brisk imports of Japanese manufactured goods.
Oil money shores up financial markets
In April 2003, the benchmark Nikkei 225 index plunged to 7,607.88 points, the lowest level since the burst of the bubble economy in the early 1990s. In tandem with a gradual recovery in the economy, stock prices began to rise. The pace of price rises increased last spring, with foreign investors becoming a major engine for the rising Nikkei. Market analysts say foreign investors have high expectations of progress in reforms under the Koizumi government, and also think highly of the Japanese economy's resilience to high oil prices.
Foreign investors have played a leading role in the bond market as well. According to Shinkin Central Bank Research Institute in Tokyo, foreigners were net buyers of Japanese bonds worth nearly 12.3 trillion yen during January-August 2005, up 44.8% from a year earlier, and 80% more than the nearly 6.9 trillion investments they made in the stock market during the same period.
According to the institute, British investors' presence in the Japanese securities market is particularly conspicuous. Investments from Britain began to surge sharply in mid-2004. During the January-July period of 2005, such investments totaled a little more than 8 trillion yen, or about $69.5 billion, up 30% from the same period of the previous year. Although investments from the US also rose 49.8% during the same period, their size was much smaller at 2.5 trillion yen. The institute attributes a sharp rise in British investments to an increased inflow of oil money via European financial institutions in London. Saudi Arabia's holdings of foreign currency-denominated securities totaled $68.6 billion as of the end of July 2005, up 160% from a year earlier, the institute says.
Oil-rich Arab countries have flexed their financial muscle overseas in recent years amid rising oil prices, as they did during the two oil crises of the 1970s. According to the Energy Information Administration of the US, oil revenue of the OPEC member countries grew 27% in 2005 to about $430 billion. Oil export revenue of Saudi Arabia, the world's largest oil producer, is estimated to have hit a new record high of about $157 billion in 2005, up $51 billion from 2004.
In addition to oil, gold prices have been rising sharply on global markets on fears of terrorism and a tightening of supply and demand. The terrorist attacks in the US on September 11, 2001, revived the popularity of gold as a safe haven in an emergency. In Japan, gold prices have been hovering at their highest levels in 15 years. Analysts say that part of the surplus oil money is flowing into commodity markets. Late last month, a high-level Japanese delegation from the Tokyo Commodities Exchange (TOCOM) visited the Dubai Metals and Commodities Center to explore the possibility of strengthening ties.
Investors in the Middle East, flush with cash from the oil-price boom, are looking for new places to put their money. They are flocking to Asian real-estate markets, including Japan's, as the weaker US dollar and renewed confidence in Asian economies - and currencies - make Asian property look more attractive than ever. Since last summer, oil money has been flowing into the Japanese real-estate market, fueling what analysts call a "mini-bubble" of property prices in Tokyo.
In December, Singapore-based CapitaLand Ltd, one of Southeast Asia's biggest developers, established a real-estate company to offer investment-advisory services to the Middle East and develop projects in Malaysia, China, Japan and elsewhere in Asia. The company plans to offer $500 million of real-estate investments to investors in the next two years. Last year, CapitaLand set up a $300 million property fund with Arcapita Ltd, a Bahrain-based investment bank, to invest in Japanese property.
With an eye on oil money, Mizuho Corporate Bank and Sumitomo Mitsui Banking Corp, two of Japan's biggest banks, are planning to set up business footholds in Dubai this year. At present, most oil money has been invested in the US financial markets via European financial institutions, especially in London. According to analysts, as of the end of September 2005, Britain held US Treasury bonds worth $182 billion, 2.6 times the amount the country held a year earlier. The sharp surge in Britain's holdings of US Treasury bonds is believed to be the result of huge amounts of oil money flowing into the bonds via European financial institutions in London. Oil money has been trickling into the Japanese markets since around summer last year. As prospects of an end to years of deflation are growing, analysts expect the flow of oil profits into Japan to increase.
Furthermore, oil-producing countries in the Middle East are spending more on infrastructure development and capital investment, bringing new business opportunities for foreign companies, including Japanese firms. Last May, Mitsubishi Corp, Japan's biggest trading firm, won a $3.4 billion contract to build a light-rail network in Dubai, the first urban commuter metro in the Persian Gulf. Mitsubishi leads a group of companies that includes such general contractors as Obayashi Corp and Kajima Corp to build a 10-kilometer-long tunnel and lay about 70km of rail line through the city.
Dubai, the second-largest of the United Arab Emirates' seven sheikdoms, is in the middle of a construction boom as it invests billions of dollars to improve its infrastructure to keep pace with the country's nearly 10% growth over the past few years. In November, Mashreqbank of the UAE and Mizuho Corporate Bank agreed to provide a guarantee facility to the Dubai Rapid Link consortium, which is building the Dubai metro project.
Oil spike fuels auto exports
Japan's 2005 trade surplus narrowed by 26.5% from a year earlier to 8.785 trillion yen, marking the first decrease in four years. Exports rose 7.3% to 65.661 trillion yen, while imports surged at a much faster pace of 15.6% to 56.876 trillion yen as rising energy prices inflated the value of oil imports. In December alone, Japan's exports rose 17.5% from a year earlier to a record 6.338 trillion yen amid rising shipments of automobiles to the US as well as electronic devices to Asia, although imports also hit a record 5.424 trillion yen, up 27.3% from a year earlier.
Fuel-efficiency awareness has boosted sales of Japanese cars in the US, the world's biggest auto market. Japanese auto makers continued to snatch US market share from their US counterparts. The combined US market share for General Motors, Ford and DaimlerChrysler AG's Chrysler Group fell to an unprecedented low of 56.9%, down from 61.7% three years ago. At the same time, Toyota, Honda, Nissan and other Asian brands saw their US market share climb to 36.5%. Japanese auto makers alone grabbed a record high market share of 32.2% in the US in 2005, with Toyota and Nissan reporting sales increases of 9% or more for the year. Toyota's US sales were up 10% over 2004, with the company's popular hybrid cars lifting its sales. US consumers' interest in hybrid cars has been stimulated by heightened interest in fuel costs as well as the environment amid high gasoline prices.
Of the approximately 5.47 million autos Japanese makers sold in the US in 2005, roughly a third were shipped from Japan. Led by resurgent exports to North America, Japan's auto exports also rose for the fourth consecutive year in 2005. Japan exported 5.053 million autos, up 1.9%, in 2005, marking the first time in 12 years that it has shipped more than 5 million autos abroad. Exports to North America, to where a little more than one-third of Japanese exports are shipped, grew for the first time in three years, totaling 1.854 million units, up 7.4%. Japanese auto makers assemble all their hybrids at domestic plants. In the North American market, Toyota's hybrid sales soared 170% to 151,000 units in 2005, while Honda's rose 60% to 44,000 units.
Meanwhile, US auto makers were stalling. GM's sales fell 4% for the year. Ford's sales also dropped 4% in 2005, as consumer demand for trucks and sport-utility vehicles (SUVs) fell in the face of high gasoline prices. Higher material and labor costs, as well as a loss of market share to Japanese rivals and a drop-off in demand for SUVs, all contributed to the malaise. GM, the world's largest car maker, posted a net loss of $4.8 billion for the October-December quarter, compared with a loss of $99 million a year earlier, in the face of high costs, reduced market share and flat sales of SUVs. In November, GM launched a restructuring plan involving 30,000 job cuts and nine plant closures in North America.
Following in GM's footsteps, Ford also announced last month that it would close 14 plants in North America, resulting in the loss of up to 30,000 jobs, nearly a quarter of its North American workforce. Ford's share of the US auto market slumped to its lowest level since the late 1920s, to 17.4%.
To be sure, strong exports, especially to the US and China, have been a major driver of the Japanese economic recovery. But high oil prices have fueled Japanese exports to major oil-producing nations as well. Personal consumption is booming in oil-producing countries, resulting in increased imports, many of them from Japan. Exports by OPEC member countries are estimated to have doubled to more than $600 billion since 2002, while their imports are also estimated to have grown by about half that, to well over $300 billion.
Ironically, while Japanese drivers are crying about high gasoline prices, Japanese auto makers are jubilant about booming exports to Russia and other major oil-producing nations. Japan's overall exports to Russia jumped a whopping 40.9% in terms of value during the January-November period from a year earlier, with exports of used autos doubling and those of new autos surging by more than 30%.
Among Middle Eastern countries, Japan's overall exports to Qatar, Kuwait, Iran, Oman and Saudi Arabia rose 72.0%, 26.9%, 22.5%, 20.5% and 14.8%, respectively, in value, driven by strong shipments of new autos. And in Latin America countries, Japan's overall exports to Venezuela and Mexico - both major oil exporters - rose faster than other regional countries in value, soaring 56.8% and 30.9%, respectively.
The same story held true in Africa, with Japanese exports to the Democratic Republic of Congo and Nigeria climbing faster than other countries on the continent, ballooning 86.3% and 35.7%, respectively. Japanese exports of steel and general machinery to oil-producing countries are also on the rise, reflecting strong capital investments there.
Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economics. Masaki's e-mail address is [email protected].