“Tremors of an Age of the Warring States in International Trade”

Here’s a look into what goes on in the minds of many people here—probably more in the media and political ranks than the business world—regarding the US treatment of the Toyota recalls.

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Yasuhiko Ohta, a member of the Nikkei board of editors, has a column in the 20 March edition entitled “Tremors of an Age of the Warring States in Trade(通商戦国時代の響き)” that criticizes the Japanese Government for staying above the fray on Toyota’s braking problems in the United States. He thinks that “the Toyota bashing in the US carried an element of political and diplomatic problems from the outset,” citing LaHood’s role as a member of the Obama cabinet in “setting fire to the US consumer’s sense of unease through [his] congressional testimony,” the “leading role played by the US Transportation Department’s National Highway Traffic Safety Administration in criticizing Toyota,” and the prominence of congressmen and senators from regions that have strong connections with the UAW and US auto manufacturers as the angry voices in Congress. He goes on to claim that “the pressure leading to trade friction is in the danger zone, where a small incident can lead to a blowup.” He takes President Obama’s State of the Union address and sees Obama’s goal to “double our exports over the next five years” as leading to a push to “take away shares of emerging markets from corporations from other countries by force if necessary.” He closes with the following two parargraphs:

“The curtains are rising on an Age of Warring States in Trade. Shouldn’t the uproar surrounding the recalls be understood within that larger context?

Toyota tripped on its own regarding the safety problems of its product. But it is also true that pressure to trip up competitors is mounting on a level other than safety. Since the Hatoyama administration does not have the diplomatic power against the US to resolve the issue, Toyota must work on the Obama administration on its own.”

Americans probably don’t need me to tell you how incomplete and misguided this analysis is with regard to Toyota’s predicament. But this is no nationalist or conspiracy theorist blogger, but a member of the Nikkei board of editors. So, even discounted for Nikkei’s dislike of the Hatoyama administration and its budget-busting handout policies, you have to believe that this is the kind of thinking that is fairly common in the Japanese establishment. Now, some things that these people miss:

1. LaHood’s personality as a big reason why he wings it, his political cachet as a Republican in a Democratic cabinet as the reason why he is allowed to do so.
2. The NHTSA’s need to cover its butt.
3. The UAW’s grip over the Detroit Three contrasted to its lack of influence over the largely union-free Japanese manufacturers.
4. The countervailing congressional voices from constituencies with Toyota operations.

I hope this helps anyone who has to explain what’s going down over there. And the real trade war story, if there is going to be one, will of course be a US-China story.

If Matt Dioguardi Thinks the Dollar Is Coming off Its High Any Time Soon…

Well, he better think again.

Riding Out the Economic Storm in Singapore?

Is this guy trying to tell us that the Singaporean economy may contract by 9% in 2009, yet he doesn’t see any sign of a fall in consumption or housing demand? And the reason for this is Singapore’s public/private-sector social safety net that protects jobs and income?

There must be some truth to that idea. Social and legal norms do affect the way economies react in the face of an economic downturn. For example, it’s much easier to shed excess labor in the United States than it is in Japan; you only need to look at the statistics to see that. It’s probably the same thing in Singapore. But no visible change in consumer and household behavior? I’ll believe it when I see the numbers.

Incidentally, it’s interesting that writers tend to take a somewhat similar 5-6% (2009) downturn in the Japanese economy and criticize it for relying too much on exports. For those people, the parts of the Japanese economy that are not linked to exports are an inefficient, uncompetitive drag on the Japanese economy. Perhaps. But try telling that to Carrefour and Wal-Mart, whose forays into the Japanese retail sector have been less than a resounding success.

I’m not saying those critics are wrong. But they haven’t made their case either. I think they’re just doing a riff on a piece of conventional wisdom.

”No Buffer, No Resiliency”? Maybe. But What Does That Have to Do with the Current Economic Crisis?

On his blog for The Atlantic, James Fallows appears to be supporting “the argument that today's lean, hyper-efficient, ‘just in time’ economy was magnifying the effects of today's economic collapse.” Sounds plausible, but how does it stack up against statements from sages such as Alan Greenspan—okay, bad example—suggesting that lean production practices had the effect of smoothing out economic cycles? Let’s give the blame-lean-production theory a closer look, using the auto industry as an example.

Let’s say that a financial crisis leads to a credit crunch that deprives a cash-starved, lean-production auto company of adequate financing to maintain its production, distribution and sales operations. This process is repeated up and down the supply chain, causing overall auto production to plummet. The idea behind Fallows’ argument I suppose is that if this auto company (and its suppliers as well as its distribution chain) had maintained stocks of parts and components, it could continue producing autos even without financing until… until something happened to reduce the growing piles of unshipped autos on the company yard and docks and unsold autos on the dealer lots? And how does allowing that to happen ameliorate, rather than compound, the difficulties for the auto company? The current financial crisis, which has nothing to do with lean production, precipitated an economic downturn, which has nothing to do with lean production, that has lead to a dramatic fall in auto demand, which has nothing to do with lean production. The financial crisis exacerbates the precarious financial situation of the Detroit Three, which is connected to lean production only to the extent that they may have lagged behind their foreign competitors in adopting the practice.

The potential flaw in lean production lies in its logistics, not economics. Supply chains can indeed be disrupted, sometimes with dire consequences. That is why, for example, states and energy producers hold large, expensive, but immediately accessible reserve stocks. That is why manufacturers maintain multiple sources. Both these needs, of course, are balanced against costs. Auto companies are in less of a spot than providers of products whose supplies must not allowed to be disrupted, though they did encounter serious problems when the Niigata Earthquake damaged the production facilities of the major supplier for a vital component. Even then, the industry as a whole coped remarkably well, with what wound up being a mere blip in production—nobody noticed anything unusual at the retail level.

On a final note, the assertion that “’Just-In-Time,’ is based upon ... a wholly unjustified wager that the economy and its supporting systems will always remain stable and never experience disruption” and that it has anything meaningful to do with the current economic difficulties just doesn’t hold water; the whole thing is a straw man that was set up to justify an unfounded argument. Nobody is making such assumptions save the author of the essay for which Fallows uncharacteristically fell without bothering to match it up against reality.


ADD: I urge those of you who usually don’t read the comments to click to see what Janne has to say. I hope that my response is as interesting.

President Sarkozy and Group of LDP Backbenchers Both Want Sovereign Wealth Funds. So What, You Ask?

So what indeed. The President of France pushes sovereign wealth funds to “protect” European businesses, while a proposal for a Japanese SWF from a group of LDP backbenchers follows the gyrations of the financial markets. Lesson?—the French will be French, while Japan won’t be seeing an SWF any time soon? I’m not quite sure; you tell me:

President Sarkozy on January 8 proposing to use the state-owned Caisse des Depots et Consignations, which manages state pensions, to “protect” French businesses from sovereign wealth funds and private speculators:

"There is no question of France remaining unable to react in the face of a rise in the power of extremely aggressive sovereign funds which only follow economic logic," Sarkozy said.

"France must protect its companies and give them the means to develop and defend themselves. I want the CDC to be the instrument of this policy of defending and promoting the essential economic interests of the nation," he added.

Note his use of the terms “economic logic” and “economic interests”.

[A]n aide to Sarkozy…denied that Sarkozy wanted to set up France's own sovereign wealth fund or wrest the CDC away from parliament, whose powers Sarkozy has actually promised to strengthen.

Mr. Sarkozy on October 21 calling on EU members to set up SWFs to keep European businesses in European hands:

“Stock markets are at a historically low level. There could be an opportunity to create our own sovereign wealth funds, which would make it possible to defend national interests and European interests,” Mr Sarkozy said in remarks at the European Parliament.

Here’s Mr. Sarkozy on October 24, announcing plans for a French SWF using CDC money:

President Nicolas Sarkozy on Thursday said France would set up a new “strategic investment fund” to stop French companies from falling into the hands of foreign “predators”.

Let’s turn to Japan. Here’s a July 3 report on a LDP project team, which came up with a plan to set up a Japanese SWF using 10 trillion out of the 150 trillion yen held in public pension funds. There was less here than meets the eye. According to the proposal, the SWF would continue to be subjected to the same 2 to 1 split between domestic bonds and other assets as the rest of the funds and would share the same 3.2% annual return target for a five-year trial period. An earlier report had Kotaro Tamura, the executive director of the PT (Yuzo Yamamoto, a former Financial Services Minister, chaired the PT), pushing for an 8.5% target. The text of the proposal is nowhere to be found on the Internet.

Fast forward to October and the U.S. stock market meltdown, when Mr. Tamura attracted foreign media attention, this time with the idea of using an SWF to buy up distressed assets in the United States and Europe.

"We should send the signal that we are ready to save the world with this money," he said in an interview.

Tamura leads a group of 65 lawmakers from the ruling Liberal Democratic Party who have proposed to Prime Minister Taro Aso that Japan treat the global financial meltdown "as a huge opportunity for us."

They are urging the government to inject some of its abundant cash into troubled U.S. and European banks, in return for equity, and to purchase distressed corporate assets at fire-sale prices.

I have yet to find a domestic news source regarding the 65 lawmaker group and its relation to the LDP PT, but let’s take the English-language news reports on faith. In any case, Mr. Tamura had to change his tune when the Japanese equity market collapsed:

What we should do is to buy stock and real estate with government assets…If the government and BOJ can’t act, there is no alternative but to close down the Tokyo Stock Exchange.

Who knows, we may wake up tomorrow to find that the Japanese government buying up Japanese stock, real estate, and real estate-based securities. But something tells me Mr. Tamura’s political pull falls short of his ambitions; helping regional banks stay afloat appears to be about as far as the Aso administration is going to go as far as propping up banks and non-banks are concerned. Beyond that, bailing out major financial institutions (unnecessary, knock on wood) or real estate businesses (undesirable) is a step that the Aso administration or any other administration for that matter will not be able to take without potentially fatal political repercussions.

I can see how the English-language media needed the Japanese buzz. As for the EU following Mr. Sarkozy’s lead…I’ll believe it when I see it.

Extended Weekend Brings Joy to LDP?

Nothing says it’s better to be lucky than good (knock on wood, LDP) than the state of the Japanese financial industry, whose difficulties in the 90s and early 00s have put it in position to snap up choice real estate occupants—actually pieces thereof. Among other things, this puts the Aso administration in the position of claiming that Japan is in an exceptional position within the G-7 and that it would not have to resort to the extreme measures that other OECD member countries have to undertake. Now normally, the Japanese authorities would be the first major financial market to be put to the test. However, this Monday happened to fall on a national holiday, so the markets will only open on Tuesday. In the meantime, the inexorable rotation of our planet has forced the U.K., Germany, and France to come up with multi-hundred billion dollar rescues plans for their financial institutions. This coordinated effort has pushed up the Monday financial markets worldwide, giving more confidence to the Aso administration to come out on Monday and claim that LDP-New Komeito coalition’s management of the post-bubble economy has enabled Japan to position itself to weather the fallout better than any of its OECD colleagues.

Maybe it is better to be lucky than good after all.

Why Do Financial Markets Close for the Weekend?

Since time immemorial, nature has never stopped to rest on weekends, and neither has man—or humans, in these politically correct days. Even today, after the ecumenical Christianification of the temporal rhythm of human activities, manufacturers and service providers are open for business, and tractors and fishing boats are at this very moment braving the elements to keep us fed. So why should securities exchanges close down two out of every seven days, when investor sentiments can change overnight due as the result of boons and calamities real and imagined?

I Am Tempted to Call It the KaputThing Bank

But I won’t, because—who knows who’s next?

So, Russia was the first choice, but Iceland has to make do with the IMF? Boy, those boys at the IMF must be mean.

Prime Borrowers Also in Trouble? Did Anyone Warn Us?

I don’t follow the economic scene very closely, so the NYT report on prospects of a second, far larger American wave of home mortgage defaults came out as complete surprise to me, and a disturbing one too. I remember watching the housing boom helping the US economy ride out the aftereffects of 9.11 and arguably put George Bush over the top in 2004. I used to wonder how long capital gains for homeowners could continue to outstrip economic performance. The bet turned out badly for the sub-prime market; now, the horror show is coming to the rest of the home loans market.

Are we in for an even bigger shock to the financial market?

The Financial Crisis: As Good as Any Place Else to Start Looking

Old Japan hand Gillian Tett has a brisk, overarching take on the financial crisis.

Gasoline Taxes Potpourri

For the first quarter of 2008, the average state gasoline tax is 28.6 cents per gallon, plus 18.4 cents per gallon federal tax making the total 47 cents per gallon. For diesel, the average state tax is 29.2 cents per gallon plus an additional 24.4 cents per gallon federal tax making the total 53.6 cents per gallon.
—from Motor Fuel Taxes, American Petroleum Institute

Let's do the conversion math. For gasoline, that’s a 4.86 cent/liter federal tax and a 7.56 cent/liter state tax for 12.42 cents in federal and state taxes per liter. For diesel oil, the respective figures are 6.45 cents, 7.71 cents, and 14.16 cents.

The so-called gasoline tax in Japan consists of a 5.2 yen/liter local road tax and 48.6 yen/liter volatile oil tax, for a total of 53.8 yen/liter. The “temporary” surcharge accounts for 24.3, 0.8, and 23.8 yen/liter, respectively. The light oil (i.e. diesel fuel) tax 32.1 yen/liter, of which 17.1 yen is the “temporary” surcharge.

There’s more:

You know, I think Americans would be shocked to learn that only about 60 percent of the gas tax money that they pay today actually goes into highway and bridge construction. Much of it goes in many, many other areas.
—2007 August 17; Mary Peters, U.S. Secretary of Transportation

By contrast, most of the Japanese gasoline tax money goes into the construction and maintenance of roads, including some very expensive bridges. Yes, the U.S. highway system may be going to pot. Yes, compensating Japanese landowners is expensive, and so is building against earthquakes. Still, I see a good prima facie case that Japanese roads can do without a lot of that money without risking pothole epidemics and collapsing bridges. In fact, as an American journalist said to me the other day, a few potholes here and there would have the salutary effects of showing that we weren’t overspending.

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Last month, 42 of the 47 prefectural governors in Japan told Yomiuri that they wanted to maintain the surcharge, and none of the other five opposed it outright. With regard to putting the money into the general funds, only four governors supported it. On the other hand, only 11 opposed it outright. Most of them must be waiting to see how much of the money would continue to be shoveled back into their coffers and local economies before they break either way. The Tokyo governor is a strong supporter of the status quo; wealthy Tokyo has no problems in meeting the local copayment requirements for national road project and still have more than enough money to finance the rest of its own projects—roads or otherwise. Better then, to have the money spent on Tokyo roads rather than run the risk of the national government taking a bigger cut or shunting the money to the poorer prefectures. Those poorer prefectures on the other hand would benefit from string-free cash handouts as long as they didn’t lose money in the bargain.

These governors aren’t that far off from their constituents as the two-, three-to-one public opinion polls running against the maintenance of the status quo would seem to indicate. This Asahi poll shows that the 67% who supported putting the revenue into the general funds were split 44%-44% on the reinstatement of the surcharge in the event of the handover to the general funds. That’s 29% of the sample group, much higher than the 22% who support the reinstatement of the surcharge outright. Now there may be some overlap between the two numbers (I have no way of knowing unless I see the full survey results), but the results do suggest that the Japanese public by and large would support the retention of the surcharge if the government coupled it with a major overhaul of the road development program and its implementation process and a revision of the program’s place in the list of national priorities. Can the Fukuda administration and the ruling coalition do it this fall? I am increasingly skeptical.

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If the Fukuda administration wants to put the road money in the general funds come fiscal year 2009, why doesn’t it just drop the 10-year extension of the pending special bill and use the money in the FY2008 road budget, which has already been passed?

Because the special bill is needed to extend special rates for subsidies that the national government doles out to local governments. Without it, the subsidy rates would revert to the lower “normal” rates, throwing local budgets out of whack.

Market (Screamer) Goes into Post-Bear Stearns Turnaround

Let’s hope for the sake of Jim Cramer’s wallet (but not his soul) that he didn’t follow his own advice. And now here’s Mr. Cramer doing a post mortem and basically telling his fans to buy, buy, buy, a most welcome message to the professional supporters of the cable channels and publications featuring investment news.

Now much political analysis also belongs to the same category of loud, louder, and loudest commentary. That’s a useful reminder to this blog, which in its own humble way tries to write with as much clarity as possible and still get it right, hopefully more often than not.

Do You Remember What the Analysts Were Saying When Oil Was Threatening to Go through the $30, $40 Ceilings?

I distinctly remember analysts working for financial institutions telling us that the global economy could withstand $30, even $40 /bbl oil, but that $50 would be a problem? Now we’re seeing the oil price hovering above $90 and verging on the $100 threshold, and people are finally worrying about the economy. But the main trigger of our worries appears to be the knock-on effects of subprime lending.

Are analysts making educated guesses, or are they just educated people making guesses? Maybe the Upper House Financial Affairs Committee can summon them to testify under oath.