TOKYO - Makoto Inoue, CEO of Japanese financial services group Orix, recently warned the economic situation in the U.S. is alarmingly reminiscent of the time of the subprime mortgage crisis. In an interview with The Nikkei, Inoue also predicted that Europe's economy is likely to bottom out and start picking up again soon, while China's economic growth will slow down. Excerpts from the interview follow.
Q: Your company makes about 30% of its revenue from overseas operations. How do you see the outlook for the world economy?
A: It is generally said the U.S. economy is in fine shape. But some indicators, including growth of initial public offerings, suggest parallels between the situation now and how things were one year before the 2008 collapse of Lehman Brothers Holdings. U.S. banks are again offering subprime mortgages to consumers with low creditworthiness. We should be worried about where this financial froth will lead the U.S. economy.
Q: What are your views about the European and Chinese economies?
A: The economic outlook for Europe is brighter than the outlook for the U.S. economy. Europe's floundering economy is about to bottom out and start looking up. The recovery phase will offer some good opportunities for mergers and acquisitions.
I think China's economy will be able to make a soft landing, but it will never return to the era of real economic growth rates of 10% or so. The Chinese economy, excluding Hong Kong, will grow at annual rates of about 4-5% at best.
Q: Do you think the Japanese economy is now emerging from the slump triggered by the consumption tax increase in April?
A: Yes I do. The overall economic conditions have not changed a lot. Since Japanese manufacturers shifted production overseas in the late 1990's, a weaker yen doesn't lead to a sharp rise in Japanese exports. Banks are eager to lend, but small and midsize companies are wondering if they should borrow money for capital investment at the moment.
Q: As an institutional investor, what parts of the world or what kind of projects are you especially interested in?
A: As for areas, we are closely monitoring Cambodia, Myanmar, the Middle East and Europe. In Europe, we see now a wide range of assets for sale, such as the sale by banks of entire Latin American operations.
With regard to Japanese real estate, we think now is the time to sell rather than buy. But American investors disagree and argue we should be buying. Overseas investors appear to take the weaker yen as a cue for buying Japanese assets. But they start selling them all at once when the yen strengthens. The prices of Japanese real estate could plunge.
Q: Foreign shareholders own more than 60% of Orix. How do they see the Japanese economy?
A: In the final days of the government of the Democratic Party of Japan, most foreign investors said the Japanese economy would improve once the Bank of Japan governor was replaced. They were all happy when Haruhiko Kuroda took the helm at the central bank. But foreign investors are now beginning to have doubts about Japan's economic outlook because the government has yet to announce a convincing growth strategy, which should be the "third arrow" of Abenomics.
What the government should do is to push through regulatory reform. If special deregulation zones were created to lower regulatory barriers, foreign capital would start flooding into Japan. One idea worth considering is to give foreigners the right of permanent residence if they bring in assets worth 100 million yen ($824,000) or more.
Q: Foreign investors are critical of Japanese companies for stashing away too much cash. Do you agree with them?
A: Japanese companies have become too reluctant to take on challenges. Many top Japanese executives are unwilling to have foreign investors among their shareholders. Many small and midsize firms are cautious about accepting foreign capital. Japanese companies are now facing the crucial decision of whether to join the community of globalized businesses.
Interviewed by Nikkei senior staff writer Shigeru Seno