Global meltdown has barely affected Japan

While London and Wall Street seems to be imploding in the current financial crisis, Japan looks to have been left relatively unscathed.

Japan has often been thought of as a somewhat isolated economy, sometimes being a negative characteristic for the world’s second largest economy, but the stark difference between the nation and the western world has never been more obvious than in this current financial storm, probably the worst since the Great Depression of the 30’s.

It seems like business as usual for Japan’s banking titans, who are looking on with a disconnected impassioned view while huge banking conglomerates in the United States and Europe teeter on the brink of destruction.

The looming credit crunch has not hit Japan yet, and possibly won’t at all with the country’s issue usually being the banks possessing too much cash rather than too little. The Bank of Japan, the county’s central bank, is unlikely to be mimicking the Federal Reserve with its huge bailouts of top institutions.

Indeed, the latest economic catastrophe is barely even making the news in Japan. There are far more pressing events taking up airtime than “Lehman Shock”, as it’s known here, such as a tainted rice scandal and an incoming typhoon weather system.

In Japanese political circles, where there is a race for a new PM coming up, the financial crisis is not high on the list of talking points.

This is not to say that Tokyo will be completely unaffected by the current troubles, far from it. The country will no doubt be threatened, at least, by a coming economic depression considering the nation is heavily reliant on its exports. Its stock market has also fluctuated and dropped this week.

However, Japan has so far escaped the turmoil that has gripped the rest of the world’s markets.

“The global downturn is viewed by the Japanese as an earthquake in a distant land, with only a ripple effect being felt here,” says Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management who manages over $5 billion of funds in the region.

“I’m not feeling the distress and anguish here that I observe happening over in the States or Europe,” Lane added.

Japan’s avoidance of the problems afflicting the rest of the world might be due to their wise handling of their debt in the 90’s. They seem to have lessened the build-up of subprime loans; a very risky key factor that most analysts agree has ignited the current crisis.

Japan says inflation is encouraging news for economy

As unintuitive as it may sound, Japanese economists are welcoming runaway inflation as it gives them the chance to foster heightened expectations of a long term jump in prices.

For the rest of the world inflation is bad news but for Japan, a quick rise in food and oil prices is being hailed as an indicator for a turnaround in the economy.

The nation’s headline inflation rate rose to the record level of 1.3 percent in the last fiscal year to March 2008, brought on by significantly increased prices for petrol, pasta and many other fuels and foods. For a country that has been in the grip of pronounced deflation over the past decade, that’s a pretty high level. The majority of central banks in developed nations would balk at anything outside the normal 2-3 percent range that they are comfortable with.

Not that increased prices are fundamentally good for the Japanese economy, they are not. You are going to get a lot less food for your yen now and both public and corporate consumers will have to tighten the belt. Apart from energy and food, inflation has remained at a relative status quo, rising only 0.1 percent in the last year.

This marked increase in headline inflation is, however, an opportunity because of its effect on real interest rates, pushing them steadily downward. If the nominal rate stays at half a percentage point then real rates will be negative, this in theory should spur economic activity in the marketplace and mould sentiment to expect prices to continue to increase.

“We have already seen certain indicators of expected inflation gaining steeply,” says Michael Lane, Global Co-Head of the Investment Management Division at Shizuoka Capital Wealth Management in a phone interview. “Jumps in prices for ice cream, theatre tickets and gasoline are felt straight away by the nation’s consumers. On the other end of the scale there is minimal effect from government bonds.”

Indeed, most Japanese experts will be hoping the inflation is sustained, but that will depend on increased wages and further trends in consumer spending. Wages currently look promising and are entering a positive cycle and will continue to influence matters as long as the Bank of Japan doesn’t meddle with interest rates.

It’s widely expected that the BOJ will not adjust rates, but economists want a guarantee that the current rates will go on in the future, at least until good inflationary expectations are solidified.