Toshio Matsuda, Commentator & Intl Economist

Straight from the Shoulder No.509

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Household budgets in the United States have been hard hit by plummeting stock and home prices, with losses now estimated to have climbed to the vicinity of $7 trillion (approximately 690 trillion yen). The limits on lines of home equity (in which homeowners borrow against the net worth of their residences) as well as for carrying credit card debt likewise continue to drop. With the U.S. by nature being a country highly dependent on borrowing and other debt, it makes perfect sense that consumer spending would decline under such circumstances. This decreased consumption is also largely reflected in the corresponding growth in savings.

The U.S. is a premier consumer-driven superpower where spending comprises a massive 70% share of the nation’s gross domestic product (GDP). As such, a retreat in consumption will naturally push down economic growth, while the national propensity to save will rise as the other side of the equation. The degree to which Americans are tightening their purse strings may also be viewed through the lens of automobile sales, which last December fell by a whopping 36% compared to the same month in 2007.

In the corporate sector, weakened consumer spending quickly translates into sinking sales, capital investment cutbacks and personnel reductions. The U.S. unemployment rate now stands at 7.2%, with the current momentum likely to push it up to 8% soon. This is twice the level tracked in 2007. Consumer psychology, meanwhile, exerts a major impact on redirecting money that has been placed in savings back into spending. When city streets appear to be awash in people out of work, the consumer mentality will naturally remain in the dumps. U.S. President Barack Obama has targeted this crisis with plans for an economic stimulus package totaling $787 billion (70 trillion yen). Some $356 billion (35 trillion yen) of that money is earmarked for use in school construction, infrastructure improvement, energy development and other sectors expected to have a direct impact on fueling employment. However, only 7% of that subtotal is slated to actually go into use during 2009.

In this way, the Obama business stimulation budget tends to be spread over a wide range of targets, failing to be concentrated in any one particular sector. In the midst of such an extraordinary recession, steps must be taken to focus fiscal stimulus measures in fields that provide the proverbial greatest bang for the buck in terms of job expansion. The market continues to entertain high hopes for the Obama plan, although I am afraid that this particular vision for injecting public funds into the economy may be totally off target. As noted, the American people have seen a total of some 690 trillion yen in financial and real estate assets dry up in the current economic slump. Despite that, the Obama plan calls for assistance of only 80 trillion yen, with that to be spread out over an extended period of time. The announcement of such a plan was destined to dampen investor hopes, and I am concerned that the market may tail off into a crippling state of despair once again.

The weakened state of America on the economic and political fronts early in the 21st century underscores the fact that it has become impossible to control either the country’s economics or its politics solely on the strength of national initiative. The U.S., essentially, is a consuming and importing superpower accustomed to spending money right and left as soon as it comes in. Contrasted to that, Japan and other Asian countries are renowned saving and exporting superpowers. A traditional balance, therefore, has been struck under which red ink run up in the U.S. is essentially covered by Asian black ink, with a pattern in which both sides flourish under that formula having taken root. Under this scheme, however, if U.S. consumers continue to stash their money in banks and refuse to get out and spend, Asian exports to American shores will level off. That would cause the conventional balance between the U.S. and Asia to fall apart. Some observers, for example, predict that China’s growth rate has already fallen to 6% and may further fade to the 5% level for the current year.

All in all, there is no reason to believe that the Asian economic recession will halt until the business slide in the U.S. turns the corner. Looking back on history, situations in which global recessions have dragged on long term have invariably resulted in the outbreak of world war. In view of this reality, I have repeatedly predicted that a Middle East war could occur in 2009. Let me add, though, that it is possible to pull out of recession without going to war. This is an accomplishment, which although impossible for America to achieve on its own resources, can in fact be pulled off in Asia ? and particularly by Japan. Allow me to explain.

Under the current depressed conditions, the countries of Asia are going all out to export their goods to America, even if they need to engage in the dumping of those commodities to do so. But this course of action will only further worsen the U.S. economy, with the bill to be paid for such policies destined to come back to haunt Asia itself with considerable severity. It is high time, therefore, for Japan, and not America, to take the initiative in launching policies geared to direct the income of the Japanese people away from savings and into spending. What I am saying, essentially, is that Tokyo needs to launch bold domestic demand stimulus measures aimed at promoting a “Buy America” movement.

Under that scenario, if U.S. exports to Asia begin to rise, domestic production in America will also turn toward recovery and the worsening of the recession will wind down. Clearly, the Obama economic stimulus package will fail to do the trick without support in the form of domestic demand expansion policies from the countries of Asia. Japan, and the rest of Asia, therefore, must recognize the importance and the mission of saving themselves by coming to the rescue of America. No further time should be wasted in restoring and expanding the essential deficit-surplus balance that has existed between the U.S. and Asia.

As I have outlined, therefore, for America working on its own, the only truly reliable remedy for recession is war. To avoid going down that dark road, therefore, there is a need for Asia to act in responsible fashion, with Japan particularly showing the way by guiding the world back down the path to growth and prosperity.