Nippon in neutral

Anyone in the Commonwealth waiting for a magic rebound in Japan’s economy is in for a disappointment (or, in some cases, bankruptcy). I’m no Johnny come lately on this note, and I’ve been cautioning folks that Japan’s economy is more problematic than promising.

Indeed, Japan’s biggest export seems to be bad economic news. The latest bummer to hit the financial press is that retail sales in department stores have now reached their 14th consecutive month of decline. That’s a mighty long slide.

The Japanese Department Stores Association reported that June’s sales slid 1.8 percent year-on- year.

Japan, then, is mired in a situation in which businesses are doing lousy, employees are spooked about their financial futures, and–since employees are also consumers–consumers are cutting back on spending. Result: Revenues for businesses slide, employees get even more worried, consumers get even stingier, and another full turn in the downward economic spiral is completed.

So we see the “demand side”–consumers–impacting the “supply side”–which is businesses. It takes two to tango.

Japan’s underlying problem is really on the supply side. Crony capitalism, heavy handed government planning, and a crooked (by U.S. standards) financial sector have created a mutant business environment in which capital doesn’t necessarily flow to the best places. Until those problems are solved–and there’s no real reason to think they will be solved–Japan will remain stuck in economic neutral. Japan has some overgrown industrial Godzillas that are heavy-footed and laden with debt. Which, of course, is lousy news for the banking sector, which is in a constant state of semi-panic over their bad loan lists.

Compared to most of the globe, however, the Japanese are still well-off. The average Japanese, in fact, has more economic muscle than the average resident of New Zealand, Australia, Canada, or England. I mention these countries to demonstrate that although the “crony capitalism” label is often applied to Asian economies, the “benign socialism” of the European mentality that’s taken root in various countries has been even more economically destructive.

In fact, Japan may have a fundamental advantage over such economies: The lack of a entitlement mentality. The average New Zealand financial reporter may lament Japan’s lack of a “social safety net,” which, in other words, means that the Japanese may be more inclined to get out of bed in the morning and go to work. In the long run, that kind of work ethic will serve Japan well.

For now, though, and for the next two years or so, Japan will continue to be stuck in neutral. The economy might zig and zag a bit, but until the fundamental problems are cleaned up, Japan’s days in the economic fast lane are mere memories. That doesn’t mean that the Japanese won’t continue to export tourists, but it does mean that the competitive realities will continue to be challenging. If the Commonwealth doesn’t want to become economic roadkill, it will have to face this economic reality and react intelligently.