Investment summit: America and Japan

Professor Edward Lincoln gave two reasons for the dramatic slump in Japan’s trade since September, in today’s afternoon session at the Fund Strategy Investment Summit in St Moritz.

The New York University academic said that Japanese firms had allowed inventories to build up substantially despite a drop in industrial output of 31% starting in June 2008. Eventually it reached the stage where exports had to be cut dramatically so the spare inventory could be sold off.

He also pointed out that Japan’s exports are concentrated in sectors particularly hard hit by the global downturn, such as cars and electronics.

Nor is Japan unusual in East Asia, in having suffered a recent sharp decline in exports. Neighbouring states such as South Korea and Taiwan have suffered too, although not as much as Japan.

Lincoln went on to argue that Japan’s falling exports will lead to a decline in its current account surplus, which could in turn strain global economic relations. Japan will have less capital available to help meet America’s external financing needs than it has had in the recent past. This at a time when America’s financing needs are increasing as a result of its massive fiscal stimulus package.

Overall he said that Japanese GDP looked set to shrink by 4-6% in 2009, the sharpest fall since 1945. A revival will probably depend on an American revival bolstering demand for Japanese exports.

Vanessa Drucker, the American editor of Fund Strategy, outlined the results of her investigation into how the five big Wall Street investment banks disappeared in the recent financial turmoil. She traced their demise to a meeting between the broker-dealers and the Securities and Exchange Commission (SEC) on the afternoon of April 28, 2004.

On that day, the SEC succumbed to intense lobbying from the investment banks to allow a relaxation in their capital rules. The banks were allowed to increase their leverage enormously and ultimately ceased to exist as a result.

Drucker warned that European banks were, and in many cases remain, highly leveraged. “There is a lot of pain ahead for European banks,” she said.