Look carefully through the gloom of a sputtering local economy, mine closures, ballooning state debt and rising unemployment and you might catch a glimpse of the first signs of next year’s recovery, courtesy of the country that started it all in the 1960s – Japan.
Once Australia’s biggest trading partner with a steel industry that demanded iron ore, coal and other commodities (just as China is today), Japan has been an economic backwater for more than 20 years.
Rather than grow rapidly, as it did during the hectic rebuilding phase in the decades immediately after WWII, Japan slipped into a period of no growth (at best), incompetent government, and the high costs associated with an ageing population.
It is early days in the Japanese recovery story but there is the potential for the country to rekindle its once-close relationship with Western Australia, as its manufacturing sector springs back to life thanks to a dramatic change in economic policies.
Rather than endure another decade of stagnation, recently elected Prime Minister Shinzo Abe has adopted a growth-at-all-costs approach, which includes depreciation of the Japanese currency, encouragement of a modest amount of inflation to counter years of deflation, and aggressive monetary stimulus.
The results have been electrifying. Consumer spending grew by a spectacular 3.5 per cent in the first quarter of the year, the stock market is up by 60 per cent, and the Tankan survey of manufacturing activity rose to +7 in May compared with -4 in April.
For business observers, the mere mention of the Tankan survey brought back memories of when it was the most important measure of WA’s economic outlook, even though it covered activity in Japan.
Expansion in Japan’s manufacturing sector traditionally flows directly into demand for raw materials, and it should not take too long for Japanese companies to become more aggressive in their buying habits, perhaps even giving the dominant Chinese a bit of competition.
To wrap a few numbers around the ongoing, albeit largely forgotten, importance of Japan to Australia in general (and WA in particular), last year’s shopping list included $11 billion spent on iron ore and $18 billion on coal, confirming Japan as Australia’s second biggest trading partner.
Importantly, that level of buying was during a recession year in Japan. If current indications of a revitalised economy are confirmed, and if the new government can maintain its momentum, then Japan will reclaim its position as a customer of growing (not shrinking) importance.
There are risks, not the least being WA finding itself as the meat in a China versus Japan sandwich and the potential for Japan to implode under its huge debt load, which stands at close to 250 per cent of gross domestic product.
Japan’s relationship with China could also be a show-stopper, with tension already high between Asia’s two superpowers on matters relating to the sovereignty of obscure islands in the South China Sea, a stand-off that took a nasty turn last week when one of the Chinese government’s official publications, the People’s Daily, raised the issue of Okinawa, an island which is home to a large Japanese population and a big US military base.
A prefecture of Japan and always regarded in modern times as an intrinsic part of Japan, the Chinese have claimed Okinawa was a Chinese tributary state as far back as the 12th century.
Whether the friction between China and Japan leads to something more significant than name-calling is a worry for the world, not just Australia.
But until that fractious relationship boils over, WA is well placed to be a beneficiary of increased competition for regional leadership as China repositions its economy around consumption-led growth rather than construction-led growth, and Japan kick-starts its moribund manufacturing and export industries.
With a bit of the luck for which Australia is famous, this country could find itself selling raw materials to both sides of an economic-growth race, while hoping that the competition between China and Japan does not turn nasty as it has in the past.
If that happens, Australia will need to walk a very narrow diplomatic line; but until then there is a real chance that Japan’s revival could prove to be the start of WA’s revival.