Japan’s Longest Postwar Recession:
The Dark Side of Globalization   

• From our standpoint, we are now in the later stages of Nouriel Roubini's "12 steps to financial disaster" i.e., a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets leading to a cascading cycle of losses and further credit contraction, and a deep, long recession. Given the first globally synchronized recession since WWII and the dramatic deterioration in virtually all economic indicators within and without Japan since the failure of Lehman Brothers in September, Japan could be facing its longest recession in the postwar period.
• The OECD's scenario for Japan is for an anemic recovery from Q1 2009. Given that OECD forecasts are still very likely behind the curve, we believe the continued declines in stock prices are a better indicator of how deep and long the recession will be.
• The key to a Japanese as well as a commodities recovery will be BRICs and China demand but the prognosis is not looking good.
• The key to China’s growth sustainability is property/construction. If property and construction in China tank badly, China could be facing its own Japan-like Heisei Malaise, meaning essentially all forecasts of 7%-8% growth in 2008~2009 will be very wide of the mark.
• For Japan, this is the dark side of globalization, where its most global companies and stocks have been hit the hardest in the sell-off, including major banks, automobile and electronic companies. These sectors have accounted for 41% of market capitalization lost year-to-date in Japan, or JPY84.15 trillion of the JPY205.41 trillion of market capitalization that has been lost in the Japanese stock market so far in 2008.
• Yet a handful of domestic consumption stocks are managing to swim against the tide, including Gap wannabe Fast Retailing (9983.T), video rental major Culture Convenience Club (4756.T), economical home furnishings chain Nitori (9843.T) and Japanese pub chain Watami (7522.T), all up between 35% and 61% year-to-date.

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