Although not seen in all corners of the world, many economies have seen sudden softening including those that have not had much of a post-crisis recovery as well as some of the stronger ones. Similar culprits for this year’s slowing appear to be in force again; the impact of rising food and energy prices on disposable incomes and consumption, the European financial crisis, concerns about actual and future fiscal tightening and the ongoing difficulties for banks to lend capital when they are under pressure to hold more.
Two new factors are on the scene this year. First, some of the “growth economies” are slowing because their policymakers are deliberately trying to slow growth from above trend. This is especially true for China. Second, and the really intriguing one, the supply chain consequences of the Japanese earthquake and tsunami. In this regard, what happens to the fortunes of the Japanese chipmaker Renesas might be one of the more important things to watch in coming weeks.
Until a few weeks ago, I had never heard of this company. Renesas Electronics is a company established in 2010 and was a merger between NEC Electronics and Renesas Technology. It is a major supplier of microchips, especially to the world’s auto industry.
In the aftermath of Japan’s tragedy, I have to admit I was one of those that did not believe that the economic consequences would spread much beyond Japan’s borders unless it significantly contributed to higher global energy prices and supply shortages. Some sharper minded people realised immediately that in our globally connected world, the consequences would be broader and deeper.
On a recent trip to Tokyo I heard plenty about this company – and the broader topic. Some people I met told me that it is responsible for 40 per cent of the chips that go into the world’s auto industry, especially those produced by Japanese companies. On June 10 Renesas confirmed what some alert people had expected, that production at its Naka factory had suffered sharply in the aftermath of the crisis.
One policymaker I saw in Tokyo told me that he has a brother-in-law that works for the company and until recently always thought it was not much of a job. Now he suggested his information is one of the most valuable in the world. A different policymaker suggested that there were probably significant consequences for the world from its problems. He suggested that the UK, US, China, Thailand and Indonesia, in that order, would be the most likely to have suffered as these countries house most offshore Japanese car production.
While it is tough to explain the degree of weakness suddenly seen in both May and June in US economic data such as the Philadelphia Federal Reserve survey, for example, the most recent Fed Beige Book had quite a few liberal references to the issue of supply chains.
On my trip, luckily I heard that Renesas is now experiencing signs of a pick-up and expects to be back to pre-crisis levels of production sooner than it had a few weeks ago. Toyota also confirmed that it expected to be back to normal production by July. It will be fascinating to see if the world starts to bounce back around the same time even if many of the other challenges remain. If so, then Japan will need to be recognised as more relevant for the world cycle than many of us have become accustomed to in recent years.
The writer is chairman of the asset management division of Goldman Sachs and former chief economist at the investment bank.
Japan is more than a 21st century Duran Duran
The world has come to think of Japan as the economic equivalent of Duran Duran – an overhyped 1980s phenomenon that has fallen into justly deserved obscurity. The triple disasters of March 11 have challenged these assumptions. Many of the great names of Japanese consumer electronics may indeed be shadows of their former selves, but Japanese companies, sometimes quite small ones, still play a crucial part in the supply chains behind such hot items as LCD panels and smart phones. The overall macro effect is not negligible. The recent drop-off in US car sales was caused mainly by the decline in sales of Japanese brands – itself a result of disruption to component production.
It is also worth pondering the fact that the first response of the currency market to the earthquake was to drive the yen higher. In fact since the subprime crisis broke in July 2007, the yen has risen 30-50 per cent against the pound, the euro, the dollar and the renminbi. Economists generally portray gross domestic product in local currencies, by which measure Japan has barely made back half the post-Lehman output loss of 8 per cent. Look at the world in yen, though, and you see a totally different picture. During the past four years US GDP has fallen 27 per cent in yen terms and UK GDP 46 per cent. In these troubled times, Japan’s global presence is actually growing in real money terms.
All that is not to say that recent signs of weakness in the global economy can be put down to Japan. The decline of US bond yields below 3 per cent suggests that what we are seeing is not a supply shock, which would be inflationary, but the re-emergence of the deflationary forces generated by the global credit crisis. The fall in the Shanghai stock market and other signs of strain in the Chinese growth story are especially troubling. The possibility remains of the entire world turning Japanese – and not in a good way.
The writer is a Tokyo-based analyst with Arcus Research