So it’s official. Or so the officials say. The Japanese government’s latest monthly report on the state of the economy proudly announces that recovery is now steadily in progress.
On the face of it, the official announcement does not look too far off the mark. Corporate sentiment is improving, profits look better, share prices are holding up, and even business investment appears to have found a steadily upward mobile path. Yet look a little bit deeper and the murkiness of the waters becomes immediately apparent.
Indeed, the window of opportunity for officially proclaiming recovery doesn’t look as though it will remain open much longer. For what the officials claim to be the ongoing recovery is nothing more than an extremely fragile, precarious and narrowly based pickup in activity for large businesses that is more or less dependent on exports and the digital household equipment boom.
In the past, the Japanese business cycle was thought to have one thing in common with airplanes: It had rear wheels that always lifted off last and touched down first. Those rear wheels of the Japanese economy were better known as small businesses. For it was the first rule of Japanese business cycles — that a downturn invariably hit small businesses first and that an upturn blessed them last.
In a downturn, the small subcontractors would feel the pain first, as their larger parent companies canceled orders and demanded lower prices to protect themselves against impending disaster. Loyalty to the parent company precluded a diverse clientele that would have cushioned some of the pain of shrinking business. This was the way things worked in the vertically integrated relationship between creatures large and small in the Japanese corporate hierarchy.
Things would work the other way round in a recovery. The first signs of recovery would come from the larger companies. Their order books would begin to fill up, their pricing powers would start to improve, and their bottom lines would begin to look better. It would, however, be a while yet before the smaller businesses were allowed to join in the celebrations.
In the initial phases of a recovery, the larger parent companies have an inventory overhang that needs to be worked off before they can go in for new production. Only once the inventory backlog has been eliminated can they think about producing anew. Until that point is reached, the smaller parts and materials suppliers have no part to play in the proceedings.
Yet laggards as they were, there would always come that point in time when the expansionary momentum would be transmitted to the small businesses. In the end, all creatures small as well as large would be allowed to bask in the warm glow of economic recovery.
So went the story in pre-lost decade, predeflation, preglobalization Japan. But now the traditional certainties of the vertically integrated intercompany relationships are no more. The trickle down economics between the parent company and the subcontractor no longer reign supreme. The larger companies are hunting for bargains among the suppliers, and their quest for the least costly ones is more often than not taking them overseas, with the rest of Asia being an increasingly frequent destination.
With the transmission dynamics of business cycles so radically altered, the recent apparent improvement in the economic climate for larger businesses is no assurance of a more broadly based recovery.
Meanwhile, the higher yen is already reaching out to snatch recovery from the hands of all businesses, whatever their size, in Japan. No wonder the officials were in such a hurry to make the recovery official — they may not get a second chance.