Japan reels under massive slide in exports

An export bubble in Japan has burst with disastrous consequences for the country that has been facing economic difficulty for the most part of two decades. It is clear now that Japan has been unable to solve the problems it encountered since the early 1990s even though it showed some strong economic growth in the past few years.

However, the economic story of Japan is one that many countries around the world are now in danger of repeating as they emulate Japan and forgot the problems it has had in the past years. As the economic stimulus packages pump money into the economy, the task at hand of rebuilding more stable economies has already given way to talk of stock market rallies and the possibility of economic growth in the third quarter of this year.

Japan's exports have effectively collapsed dropping by more than 50 per cent since the start of the financial crisis. To make matters worse, in the past years the country's companies have been investing heavily in building up their export capacity. While inventory build-up has increased, demand has plummeted. So Japan will have to scale back the production increases they've made which will effectively undo much of the progress that was achieved in the past years.

This is of course a problem that others are experiencing too as they realise the economic forecasts they based their investment decisions on were totally unrealistic or even false and the debt driven consumption based economic growth was unsustainable. Japan's GDP dropped by about 12.1 per cent in the fourth quarter of 2008 and is estimated to have fallen by about 12.7 per cent in the first quarter of this year and there will be more to come. Japan's stock market is currently at 20 per cent of the level it was in the early 1990s before it plummeted but the much bigger problem that occurred as a result was the fall in consumer confidence. Try as they may, the government has been unable to make people spend again the way they used to.

Although Japan's stimulus package for 2009 is the largest of any of the G7 countries, the government was already heavily in debt as a result of all the previous spending packages it tried to put people on a new consumption trend again. For example in 2002 the Japanese government nearly went bankrupt as it tried to achieve 1 per cent economic growth with massive construction projects.

In my view, Japan can be seen as a microcosm of the world, just like the chemical industry can be used to examine how an industry can be created, grow and mature. The land of the rising sun can help people understand some of the problems we are facing today by tracing back its economic evolution.

For example, it is true that the financial system needs to be saved and rebuilt to clear the serious flaws that have been exposed in the past months, but this will not solve the problem of over capacity that we see in many sectors today.

From consumer products, raw materials, to airports and other infrastructures to name but a few, saving the banks does not address the problem of overcapacity and the simple truth is a lot of the growth that took place in the past years will have to be scaled back. Given Japan's experience, it is possible to see that no government can always spend its way out of economic problems. The best thing a government can do is create a stable economy that encourages people to spend without worrying too much about the future.

Unfortunately government meddling and the belief you can somehow beat the business cycle, means you will always have boom and bust rather than have a recession once in a while when corrections can be made without major economic problems further down the road.

At the end of 2002, they announced that they managed to achieve the 1% economic growth they were hoping for but two years later when the real GDP figures for that year were released, the economy had actually shrunk. Fortunately for the Japanese, they still have a large elderly population with huge savings, but they have to try to encourage them to spend or at least give more of their savings to the young. Something the government has been trying to do for the past twenty years.

- Mohammad Fathi is an economist and independent consultant based in Vienna.