UK – East West Markets

Current Economic Review: Japan and UK

Recent statistical analysis has indicated that Japan’s economy is weakening. July 2014 figures showed a drop in household expenditure while factory output and inflation remained status quo. However, some analysts said ‘real’ inflation actually dropped due to the actual figure when looking at the increase in sales tax a few months ago.

Moving over to the west, the UK is currently encountering a modest economic recovery. From May there was some improvement with the country’s GDP increasing 0.6 percent from June through August. As well, industrial output did better than expected in July. However, the UK is not doing great vis-à-vis its trade deficit. This issue can affect its global business and have an impact on Japanese investments.

What else may in the near future impact the UK’s economy is if the UK breaks away from Scotland. According to Mizuho Corporate Bank’s market economist, Vishnu Varathan:

“If you get any fluctuation in gilt yields, that will have a knock-on effect on yields across the global markets. Also many Asian investors have exposure to UK and Scottish-based financial institutions from asset managers to banks to insurers, while these institutions also hold Asian assets, so they may divest to cover positions too. If the fiscal burden for what remains of the UK goes a lot higher, that could push yields up as markets would expect more bond supply to come on to the market because of the higher debt obligations vis-à-vis the augmented GDP (gross domestic product) of the UK. Durable impact will be difficult to pin down until we get further clarity, but in the meantime the uncertainty will play out as sterling weakness and weaker markets in Asia as well, so we could see equities coming off and bond yields coming off.”

Both the Japanese and UK economies are recovering nicely and faring quite well (with a few issues here and there). But the economic forecast for the two is uncertain right now, especially with the potential of Scotland becoming independent from the UK. Only time will tell if that happens and, the impact on foreign investments it will have.

Japan, UK, Economy: A Comparative Look

From the 1960s to the 1980s, Japan’s economy was strong. Today, this is not the case. Looking at Japan’s economy in 2013, one can compare it negatively to the UK’s. As economist James Carrick pointed out, today there is a mounting fear that Japan’s 2008 financial crisis will not be that dissimilar to the “prolonged period of poor or non-existent growth in the UK.”

Ben Chu, Economics editor of ‘The Independent,’ questioned whether there would ever be a full economic recovery in the UK, especially given the Bank of England’s prediction of continued stagnancy. Vis-à-vis Japan, UK, economy, Richard Koo noted the parallels between the two. An economist at the Nomura Institute, Tokyo, he said that particularly after the bubble burst in Japan, its central bank “sought to contain the destructive forces of deflation through quantitative easing.” But this didn’t help the money supply or boost bank lending.

Carrick concludes though that there is a strong sense that the UK will not encounter “a Japanese-style slowdown.” He feels that the UK is actually stronger and more dynamic and thus will not go down the same path. Nonetheless, by learning more about Japan’s weaknesses, it is easier to see what might help for the UK economy. In the UK there is has been an escalation in immigration and rising retirement ages which has boosted the economy. This is not the case for Japan which has encountered a “slowdown as [the] working population growth went into reverse.”

Still, Philip Aldrick, Economics Editor at ‘The Daily Telegraph,’ points to the “eerie parallels” between the Japan, UK, economies. Statistically the facts speak for themselves. He says, “Japan’s economic problems are well-rehearsed. The world’s third largest economy has national debt of 236pc of GDP, and a budget deficit of 10pc. The UK, by comparison, is a bastion of fiscal rectitude, with national debt of 88pc and an 8pc budget deficit, using International Monetary Fund numbers.”

One of the biggest problems facing Japan’s economy right now is the unrealistic optimism of its experts. According to professor of comparative religion, Tetuso Yamaori, “the Japanese are optimistic. They believe the good times will come.” The UK on the other hand is more realistic, “get[ting] on top of its debts before they choke off not just the economy, but the hopes of a generation. Infrastructure spending is not the solution. Japan tried building its way to growth, but it just loaded up the debt burden.” Kohei Otuska, Democratic Party of Japan politician, argued, “the Japanese people…unless they experience a crisis, they don’t’ think they need to respond.”

Thus there are parallels between the economies of Japan and the UK. It is thus worthwhile to look at the positives and negatives on each and act accordingly.

Best Countries for Business

Japan Versus UK

In a recent report by Bloomberg, Japan was ranked higher than the UK vis-à-vis the regions that are best to do business with. In this report it escalated four places, stealing the third spot, with only America and Hong Kong ahead of it. For measuring purposes, the review utilized six criteria. Two of these were: the extent of economic integration; preparedness of the local consumer base.

Perhaps another reason for Japan’s escalation in this review has something to do with its 14 percent drop in the yen against the dollar over the last year. This has increased its competitiveness in the export market.

However, Japan’s trade deficit for last year was extremely high with a substantial decrease in exports to China and Europe. Its exports have been plummeting for the last seven months with a drop in shipments of almost 6 percent in December 2012. Some analysts believe the deficit may have reached its nadir, given the expectation of an improvement in exports over the next few months. Once that happens – along with the general upswing in the world economy – there is a strong likelihood that the country’s trade deficit will shrink alongside it. This does not mean it will go into surplus in 2013 but at least it will be going in the right direction. One also has to take into consideration the escalation in the price of oil import. As well, given that Europe is still trying to deal with its debt, the region is less interested in Japanese exports.

UK Firms and India Investments

Mayor of London Boris Johnson recently said that companies in the UK should have greater access to “India’s booming markets.” For this to happen, India needs to loosen its small business protective laws. This would facilitate the process for British businesspeople seeking to makes sales to the up-and-coming Indian middle class and would also lead to poverty alleviation through the provision of cheaper goods.

Right now, there is a situation whereby many large UK corporations (such as John Lewis and Tesco) cannot work with the market in India because of laws preventing retailers from selling more than one branded product. Even though exclusive boutique labels such as Gucci and Ralph Lauren will be able to open up shop in India since they sell their own label exclusively, larger foreign markets and stores will not be able to follow suit as they are more inclined to sell more than one branded goods.

Ultimately, the law was established to protect India’s large amount of small businesspeople, trading at market stalls at each and every corner. Johnson also pointed out that British businesses would be able to save the Indian consumer money through larger-scale sales. India, he believes, has many more opportunities to “experiment with more openness.” If an insurance company in the UK can lower their household and medical insurance premiums for an Indian with a modest income, they will be able to put a significantly greater amount of money in other areas, boosting those industries. In other words, once multiple brand retailers give people greater access to cheaper basics (like food, household goods etc.), there is more chance of there being an escalation of wealth for some of the country’s poorest populace.

It is for this reason that Johnson visited India – to “make the case for openness and partnership.” He believes he made great progress in this realm.