But how will the problems of the American middle class affect people in Japan, if at all? Hopefully, as long as Japan can limit its exposure to the problems facing the U.S., there is no reason for Japan to be dragged down as well. In fact, new opportunities may arise that may renew Japan’s relationship with the United States as a result of this unease.
In the U.S., the economic situation appears more serious than has been seen in a long time. More than half of those surveyed in the report said that in the past five years they either “haven’t moved forward in life or have fallen backward.” About eight out of ten Americans also said they felt “it is more difficult now than five years ago for people in the middle class to maintain their standard of living.” And more than half of those surveyed said they expect to cut back on their spending in the year ahead.
These negative attitudes aren’t surprising given the macroeconomic environment that the U.S. is currently experiencing. Median household income is still below its 1999 peak of about $52,000 -- indicating that the U.S. never really recovered from the last recession, at least in terms of family income. Housing prices have been rising constantly during most of the first part of this decade, only to fall approximately 20% from their peak so far, with more declines sure to come. For many people, a rising home value was a way to pay for extra spending, as they withdrew their home equity during the era of rising prices. But now that prices are falling, that extra income boost is no longer available.
Finally, inflation is beginning to run rampant, with food and energy prices rising faster than they have in years. Over the past 12 months, consumer prices in the United States have risen 4%, food prices 4.5% and energy costs are up 17%. The most visible price in the United States, a gallon of gasoline, is now over $3.50 -- a record high -- and still rising. This price signal has a significant psychological effect on the American consumer, given that it is on every street corner. Americans drive about 25 miles per day, on average, and thus gasoline consumption is a significant part of their lives.
But what do all of these troubles for the U.S. middle class mean for Japan? I can think of three prominent ways in which this phenomenon will affect Japan most directly.
Already, exports to the U.S. are falling, both because of the rising yen and because of the economic pullback now enveloping the nation. In the first three months of 2008, Japan’s exports to the U.S. are down about 7% compared to last year. Since the U.S. is Japan’s largest export destination, this has had a somewhat negative effect on Japan’s economy.
Luckily, so far, Japan is finding other opportunities besides the United States. In the first three months of 2008, total exports from Japan are up 6%, with exports to China, Japan’s 2nd largest export destination, up 7%. Exports to the rest of the world (besides the U.S. and China) are up about 10%, with Japan having particular success in exporting to the Middle East, some developing countries in Southeast Asia, and South America as well.
The general rule in the United States is that in tough economic times, the party out of power has a greater chance of taking over the presidency. If these economic trends of rising prices, falling asset values and stagnant incomes continue, the chance that the Democratic nominee (still undecided between Barack Obama or Hillary Clinton) will be elected President in November. For Japan, this will almost certainly mean a chance to build a new working relationship with its most powerful ally.
If Japan can weather the storm of the United States’ economic troubles for the next year or so by limiting its exposure to the United States, diversifying its export markets, establishing a positive relationship with a new team of political leaders in the U.S., then it should be able to escape from these troubled times relatively unscathed.
Adam Carstens is a Senior Associate with Globis International School and a staff editor at GLOBIS.JP. Before working at Globis, Adam worked with the consulting firms The Attention Company and North Star Leadership Group. He helped with the research for two books, “Japan’s Business Renaissance”(released in Japan as “Samurai Jinzai-ron”) and “Got Game: How the Gamer Generation Is Reshaping Business Forever.” Prior to that, Adam specialized in foreign policy and international trade analysis for a U.S. Congressman and a U.S. Senator in Washington, DC, working to expand trade links between the U.S., China and Vietnam. Adam has also helped manage website operations for a high profile member of the Fortune 500, and led a team that created an award-winning project on the future direction of 3G wireless technologies.Adam received his MBA from the Thunderbird School of Global Management.
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