Prospects for Economic Recovery and Fujitsu Research Institute's Role
March 17, 2008 (Monday)
The shrinking trend in the global economy grows stronger with each passing day. The credit squeeze in the financial market triggered by the subprime problem is spreading from the US to the global economy. In the US, the Carlyle Group has fallen into a serious crisis and Bear Stearns, a distinguished company in the securities industry, was acquired by JP Morgan after a sudden collapse.
It is becoming clearer that the US economy has entered a downturn starting in the first quarter of the year. The global slowdown brought on by the subprime problem has led to a contraction of not only financial markets but the real economy as well; this, in turn, is spreading from the US to the far reaches of the world. US government officials have maintained that financial institutions will not be bailed out with public funds, but there is a distinct possibility that in the near future the government will have no choice but to provide direct relief to financial institutions, as Japan did in the past, if the economic downturn and credit squeeze continue.
The impact of the subprime problem on the Japanese economy has so far been small in comparison with the US and Europe. However, external demand, which has buttressed economic recovery in Japan in the past, is beginning to shrink amid the global downturn, and if the Japanese economy transitions under the current circumstances there is no denying the possibility of falling into a recession.
What is of particular concern regarding the Japanese economy is the phenomenon that could be called a political and policy recession. Under the so-called "twisted Diet", budget-related bills have not been enacted and a new governor of the Bank of Japan has yet to be appointed. In this way, politics have dragged down the economy. In addition, revision of the building codes has drastically reduced housing construction over the last half year, while revision of the money lending law has caused the non-banking sector to contract. As a result, government policy has significantly hindered economic activity, and stagnation under such unique negative factors is pushing investors away from Japan.
A vicious cycle of a credit squeeze, economic downturn and rising prices has become pronounced since the beginning of 2008. How much deeper will this downward cycle fall? How long will it continue? Is recovery possible, and if so, when and in what shape will it begin? These questions are of utmost concern to citizens, companies, governments and related institutions alike. It is the responsibility of think tanks such as FRI to provide intellectual clues regarding such issues.
Regarding the credit squeeze, there is no telling how deep the market bottom really is. The result is a pervasive sense of fear in the market, which in turn tightens the credit squeeze and perpetuates the downward cycle. Put differently, the pendulum is currently swinging from optimism of the past towards the direction of extreme pessimism. The pendulum, however, will eventually swing back again. When investors decide that the downturn has bottomed out they will set out to buy, and this will produce a bandwagon phenomenon and a reversal in the market. It is the job of think tanks to pursue strategic research and produce clues as to when and where this mechanism will be triggered.
In terms of a global economic downturn, whether or not the slowdown that began in the US will eventually reach emerging countries such as China, India and Russia is a focus of interest. Emerging countries have deep ties with the US economy through exports and investment, and as such cannot avoid being affected by the US slowdown. However, the dynamism found in the robust development of emerging countries has state-run elements in all cases; moreover, it cannot be denied that the core of the global economy dynamism is steadily moving from the US and Europe to these emerging countries. In the new global economic cycle, it is likely that the dynamism of new recovery and development will come from emerging countries. It is also the role of think tanks to uncover clues about where and in what shape this dynamism will be realized.
Lastly, I would like to touch on issues in the Japanese economy. Observers around the world see the effects of the Koizumi Administration's remarkable reforms as having quickly hit an impasse in recent years. Political problems are in the background of this phenomenon. However, what is most urgently needed for Japan, which has matured and entered a new historical period where long-term population decline is expected, is to make clear the basic strategic issues that must be tackled in this new era. Think tanks such as FRI must provide clues so that not only politicians but the country as whole is aware of our new goals.
The Japanese economy boasted a 14% share of the entire global GDP in 1986, but that percentage had fallen to 9% in 2006. In the next 20 years the population will decrease, and this percentage will likely contact to 5%. Based on the reality of our "shrinking country", what should Japan do to maintain prosperous and comfortable lifestyles and win trust and faith among the international society? Important challenges, in no way inferior to the historical accomplishment of building up the world's second greatest industrial nation from the charred postwar fields, should be right in front of our eyes. I believe the important mission charged to FRI is to analyze these challenges and present them in a manner that is clear and specific.