Tim Kelly01.26.09, 01:08 AM EST
The odds that Tokyo can get Japanese to boost spending are long. Stimulating Western demand could pay higher dividends.
TOKYO -- After throwing money at its moribund economy for a decade, Japan gave up trying to stimulate domestic demand in 2001 and began mulling ways to cut the massive national debt it had amassed trying. U.S. consumers were on a spending spree and they, rather than Japanese shoppers, helped pull Japan out of a decade of recession as the likes of Toyota Motor, Sony and Panasonic gulped down profits overseas.
Now that Americans are aping the tight-fisted habits of their Japanese counterparts, policymakers in Tokyo are dusting of their tried and failed efforts at priming the domestic pump. Japan's deeply unpopular prime minister, Taro Aso, is struggling to persuade lawmakers to approve two stimulus packages worth $110 billion that include cash payments and tax breaks. With political paralysis holding up the aid, the refrain from Tokyo's economic gurus so far has been "no we can't."
Thinking instead of ways to get Westerners back into electronics stores and car showrooms may be a more effective way of saving Japan from its economic woes. For every 1% increase in gross domestic product, Japanese corporations can expect a 5% gain in operating profit. The same gain in global GDP adds 18% to Japan Inc.'s operating income, calculates Jesper Koll, director of Tantallon, a Tokyo hedge fund. Abroad, he points out, is where all the profit growth has come from.
That imbalance means that the 35% slump in December exports from a year ago, the biggest drop ever recorded, is a worrying sign for Japanese corporations. They are responding with layoffs and plant closures. Carmakers such as Toyota (nyse: TM - news - people ) have been hard hit and the collapse of auto sales in the U.S. has exposed their weakness at home. (See "Facing Historic Loss, Toyota Returns To Its Roots")
One option for Japanese policymakers would be to help fund American economic stimulus efforts by buying U.S. Treasuries. With President Barack Obama warning of huge federal deficits for years to come, the supply of U.S. government debt will be plentiful.
Japan so far has avoided buying more U.S. debt. Its balance of Treasury securities at the end of November was $577 billion, compared with $589 billion a year earlier. The Chinese, by contrast, have been loading up on American debt, adding $223 billion over the same period to leave it with a balance of $682 billion.
Of course, buying a lot of dollar-denominated debt could be interpreted in Washington as backdoor intervention to weaken the yen. Timothy Geithner, Obama's nominee for Treasury secretary, has warned Japan, China and other trading partners to avoid manipulation of forex rates that would bolster the yen and hurt U.S. exporters. The Japanese, therefore, may feel the need to tread lightly.
Japan should stick with stimulus at home, advises Richard Jerram, chief economist at Macquarie Securities in Tokyo. However, the scale of that spending should be much more than Aso is proposing, as much as 3% to 4% of GDP rather than the current 1.5%. "Massive tax cuts are one way," said Jerram, although, he added, "the chance of that happening are almost zero."
Though the government may have to fixate on persuading penny-pinching Japan to splurge, cash-rich Japanese corporations at least can make a difference to reviving the U.S. economy, reckons Thomas Donohue, head of the U.S. Chamber of Commerce. Toyota alone is sitting on about $23 billion in cash.
"It would be extraordinarily helpful [for Japan] to invest in infrastructure to technology, to financial issues in the U.S.," Donohue said on a recent visit to Japan. After all, for many companies, America is where their best customers are.
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