Terrie's Take 452 -- Predictions for 2008

[terrie at mailman.japaninc.com]

* * * * * * * * *  T E R R I E 'S   T A K E  * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.
(http://www.terrie.com)

General Edition Sunday, January 13, 2008 Issue No. 452

+++ INDEX

- What's new
- News
- Candidate roundup/Vacancies
- Upcoming events
- Corrections/Feedback
- News credits

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+++ WHAT'S NEW

Predictions for 2008

Welcome back to the first Terrie's Take for 2008. As winter
starts to bite here in Tokyo, we look forward to the year
ahead and make some guesses about what is going to happen
to Japan, its economy, and business opportunities for the
entrepreneurs amongst us.

We see the overall theme for 2008 as one of "skating on
thin ice". There is ongoing palpable fear in the financial
community over the fall out caused by the subprime problem
and just how far the indirect shock waves will reach. Most
certainly those directly affected, American homeowners with
a mortgage, will be tightening their purse strings, and that
is surely not a good omen for gadget-producing Asian
countries. We believe that the first half of 2008 will be
very volatile, with lots of market gyrations and some big
corrections in the US markets, then settling down in the
second half, as people realize that the world still has to
go on and the falling US dollar starts to plateau.

1. Japan in Recession
As we have opined in previous newsletters, the Japanese
economy is closely linked to the fortunes of the USA. Not
only are the Japanese sitting on a pile of almost US$1trn
in US treasuries and equities, and thus exposed to a
weakening US dollar, most of the countries that are Japan's
alternative customers are buying manufacturing equipment,
tools, and parts for products that are ultimately sold in
the USA. In our experience, this means that you can look at
the coming US recession and add 3 months prior and 6-9
months post to figure out the duration of impact on Japan.
Goldman Sachs reckons the US is already tipping into
recession and will be there for at least a quarter, so we
expect the impact on Japan to last until Q3 or Q4.

2. Japanese Stocks Stay Down
Not only the troubles in the US, the fact that China is in
an end-run into the Olympics will mean that a lot of
attention will be paid to the middle kingdom at the expense
of Japan. Stock market returns there were stellar last
year, and will probably be strong again this year, at least
until Q4. Without large foreign investment coming into the
Japan stock market, and with the local individual investors
still running for cover, we see the Nikkei dropping further
for at least the first half of 2008. The second half,
however, should be a come back story, so long as the US Fed
manages its way out of the Stagflation trap it seems to be
falling in to (i.e., rising prices but little growth).

3. Increase in Bankruptcies
In Q1, wealth-intensive sectors such as real estate,
stocks, autos, etc., will continue to weaken. Although
there is plenty of cash under the mattresses of local
investors, the widening gap in incomes between the haves
and have nots means that there is a thinning of the ranks
on the consumer side of those investments. This macro
environment coupled with tightening regulations on loans
and credit to smaller companies, will remove a lot of the
business flow that small and medium-sized businesses
have had in the past. As a result, we think the level of
bankruptcies of SMEs will peak mid-year, and we wouldn't be
surprised to see the government have to unwind its
legislation that requires the Hosho Kyokai (Guarantee
Corporations) to spread 20% of their risk on SME loans, to
the banks. Given that the banks are so conservative in
Japan, this was a ridiculous rule to impose in the first
place.

4. Backing the Post Office
With the government back-tracking on reform, and thus
creating a likely blow-out of the budget, one of the
biggest sources of emergency funds in the past has been
Post Office savings. The only trouble is that the
government under Junichiro Koizumi removed the incentives
(extra interest rates and anonymous accounts) for people
to keep their money with the Post Office. We wouldn't be
surprised if a program to restore funds to the Post Office
was developed, giving the Post Office an unfair advantage
once more, over the banks. The easiest way to do this
would be to create a tax-advantaged savings bond for
individuals to invest in. This would suck billions out of
the market and give the government the capital they need
to service their pork-barrel projects and the deteriorating
pension program.


[Continued below...]

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[...Article continues]

5. Japanese M&A of Foreign Firms Increases
Although there is tremendous pressure on the SMEs, for
those companies large and profitable enough, there is still
a bottomless well of cheap funds available locally. The
emergence of yet another previously government-owned bank,
this time the Development Bank of Japan, will mean that
significant fresh risk capital will be available for
credit-worthy customers to go do M&As. But as the recent
boom has proven, export markets are where the cash is, so
we expect that the M&As will follow a similar overseas path
-- ideal for the DBJ, which is an old hand at international
transactions. Expect particular M&A action in Asia and
North America. Further, expect Japanese trading companies
to continue their consolidation of control of the mining
and transport of raw materials, particularly in the energy
and rare earth mining sectors.

6. Yen goes to JPY100 to the Dollar
While the Japanese government is deep in debt, and the
population is getting older, these negatives are a slow
malaise and will not significantly threaten Japan for
another 10-20 years. Thus, Japan offers a safe haven for
funds in the short term. The energy producers of the world
in particular like Japan and have a good impression of its
sustainability and continuing ability to produce new
technologies and products. Thus, inbound investments such
as the Dubai International Capital fund's JPY50bn into Sony
is probably a precursor of major investments by other
sovereign funds -- particularly from the Middle East,
China, and Russia.

7. Fukuda Calls Snap Election Late in the Year
The DPJ opposition party has been making the most of their
control of the Upper House in the Japanese parliament, and
have been playing the ruling party LDP particularly well.
However, the fall-out late last year between DPJ boss
Ichiro Ozawa and some of the party's other leaders shows
that all is not well in the DPJ. 2008 will be marked by
numerous clashes between the two parties -- a historic
period of open conflict for Japanese politics, and we
think the strain of it all will take its toll both
emotionally and physically on the DPJ leadership -- Ozawa
in particular. If bad health puts him in hospital, or if
ratcheting up the pressure causes the DPJ to come across to
the public as a bully-boy spoiler, then expect Fukuda to
seize the opportunity to call a snap election.

8. Birth Rate Drops Further
Despite a slight improvement in the birthrate in 2007, the
depressing news coverage of the economic outlook for 2008
will probably cause many couples who can actually have a
baby to put off plans for an extra mouth to feed. For those
who can't have kids, the causes and treatment of
infertility will start to rise in the media, and the true
extent of medical problems in the female population will
become better known. The government will enact new
legislation so as to be seen to be doing something, but
unfortunately, the permissive lifestyle, changing diet
patterns, and other environmental factors will be too deep
seated for any reasonable effect to be seen. Increased
foreign intermarriage and early childhood education about
health are two factors that will need to be addressed in
the future. But it's hard to see these happening in 2008.

9. Electric Car Hype Increases
Oil priced over US$50 a barrel makes electric and hybrid
cars economically feasible. US$100 a barrel make them
imperative. The big hurdle to auto makers producing a
viable electric car today is the lack of reliable lithium-ion
or other high-density batteries with which to power such
vehicles. The Japanese have pretty much tied up the world's
production of rechargeable batteries, and so it is only
natural to assume that the materials scientists here are
all beavering away to find the right mix of basic tech and
manufacturing to create a breakthrough product. They can't
be far away, because companies like Mitsubishi don't make
multi-hundred million dollar battery factory investments
on a wing and a prayer. A number of interesting
technologies are hitting the news in the USA, such the
nano-processing aspects of Altair Nano. News announcements
are still quiet in Japan, but already Toyota has said that
it has similar technology to Altair and that it doesn't
expect to be trumped in the battery stakes. The first two
products to the market are supposed to be the Mitsubishi
MiEV and the Subaru R1e mid- to late-next year, and
Toyota in 2010 or 2011.
http://www.greencarcongress.com/2007/12/electric-subaru.html.

10. More Cancer and Genetics Breakthroughs
One aspect of the Japanese is a safe bet -- they're great
incrementalists. And thus, any area of academic study where
sheer horsepower and tenacity are required, the Japanese
have an excellent chance of creating a breakthrough.
Traditionally in industry this has meant materials science,
but now body chemistry can be added to the prize ring. We
expect a number of significant announcements in the areas
of genetics, cancer diagnosis, stem cells, and similar
avenues of biotech research.


...The information janitors/

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+++ NEWS

- 2007 vehicle sales worst since 1972
- LDP-DPJ tax battle up next
- Goldman predicting possible recession for Japan
- Nikkei falls to low point
- Goodwill ops suspended





-> 2007 vehicle sales worst since 1972

The Japan Automobile Dealers Association says that the
sales of autos, tracks and buses, but excluding
minicars, fell 7.6% to 3.43m vehicles in 2007. This was the
lowest level of sales in 35 years. The Association reckons
that less vehicles are being sold because of declining
wages, higher fuel costs, and a shrinking population of
people who can drive. The peak year for vehicle sales was
1990, when almost 6m units were sold. Separately, sales of
minicars, those with engines of 660cc or less, also fell,
by 5.1% to 1.92m units. (Source: TT commentary from
japantimes.co.jp, Jan 08, 2008)

http://search.japantimes.co.jp/mail/nb20080108n1.html

-> LDP-DPJ tax battle up next

After the LDP's rail-roading through the lower house
(overriding the upper house) of a law to allow the
refueling of Iraq-bound US ships, political observers are
saying that the next battle will be over taxes. And this
time, the government can't be seen by the public to be
acting unilaterally, so things should get interesting.
The LDP is on the hook for a number of unpopular tax
issues, ranging from furthering debate on increasing the
consumption tax, through to a DPJ-sponsored measure to
cut petrol taxes so as to bring motoring costs down to a
reasonable level again.***Ed: Rail-roading may work in
some defense issues, but on economic ones it would be
interpreted as extreme arrogance and breach of public
trust, and would result in even worse public confidence
in the government.**  (Source: TT commentary from
reuters.com, Jan 13, 2008)

http://uk.reuters.com/article/oilRpt/idUKT33266820080113?sp=true

-> Goldman predicting possible recession for Japan

The Chief Economist of Goldman Sachs Japan says that there
is a 50% chance that Japan will follow the USA into
recession in the first half of 2008. He said that the
reason was the "inevitable, moderate slow down among
emerging economies." Goldman has dropped its growth
estimate for Japan from 1.2% to 1% for the coming year and
says that the BoJ will most likely have to forgo any rate
rises for the time being. ***Ed: Consumer confidence is now
at a 4-year low, thanks to increasing prices and decreasing
salaries. This means that any growth being enjoyed by Japan
recently is mostly export-led and fear of a recession in
export markets is resulting in a dramatic slow-down of
demand.** (Source: TT commentary from smh.com, Jan 12,
2008)

http://tinyurl.com/2bkww2

-> Nikkei falls to low point

The impact of the subprime debacle, not by direct losses
but the way the US is moving towards a recession, are
knocking Japan's exporters hard. The Nikkei 225 fell to its
lowest level since 2005, and in the first trading week of
the year was down the largest amount since an 11% drop in
1997. Market cap dropped 3.1% and as a result, China's
market cap is now higher than Japan's. Shipping, retailing,
and real estate in particular took a pummeling and as an
example, both store operator J Front and REIT DaVinci saw
their stock prices fall 11% each. (Source: TT commentary
from bloomberg.com, Jan 11, 2008)

http://www.bloomberg.com/apps/news?pid=20601101&sid=at1cydVeNmfg&refer=japan

-> Goodwill ops suspended

The government clearly has it in for Origuchi and the
Goodwill company. The Ministry of Health, Labor and Welfare
has ordered the temp staffing company to suspend operations
at all 737 branches across Japan for a period of between 2
(670 branches) and 4 months (67 branches). The punishment
comes after the discovery that Goodwill was dispatching
construction and cargo-handling workers, as well as
supplying people for subsequent re-sale through second
parties. Both practices are illegal in Japan. ***Ed: We
think this punishment is unduly harsh. The barring of
personnel dispatch in the construction and cargo industries
is purely a function of politics, where the government
continues to protect operators in those industries. There
is no valid reason for staffing firms to not be servicing
either sector.** (Source: TT commentary from nikkei.co.jp,
Jan 11, 2008)

http://www.nni.nikkei.co.jp/AC/TNKS/Search/Nni20080111D11JF758.htm



NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.

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***------------------------****-------------------------***



+++ CORRECTIONS/FEEDBACK

In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to editors at terrie.com.

-> No corrections or feedback this week.


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+++ ABOUT US

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