O.T.(If SFTBF dips, will we?)/ Doubts emerge over Japan's economy
TOKYO, March 19 (AFP) - Serious doubts are emerging among experts about Japan's new-found economic optimism.
Despite data in the past week showing Japan in a technical recession at the end 1999, analysts agreed the world's second-biggest economy was heading into an upswing.
But deep divisions appeared over whether Japan had found the holy grail of self-sustaining growth which does not require hundreds of billions of dollars of state money to keep it moving.
"At last, the Japanese economy is beginning to see the light," Economic Planning Agency director-general Taichi Sakaiya told a news conference on Friday after releasing the brightest report in years.
The Economic Planning Agency report said signs of a self-sustained recovery had "gradually appeared," but stopped short of actually declaring that one was under way.
Surprisingly, the figures that have everyone excited about Japan's prospects were hidden in the March 13 gross domestic product (GDP) figures which showed the economy shrank 1.4 percent in the three months to December.
The data showed the country in a technical recession after two quarters of contraction.
But they also showed that capital expenditure, traditionally the barometer of a coming economic recovery, bounced up 4.6 percent from the previous quarter.
"Japan is not in recession. Quite the contrary, Japan in 2000 is an economy that can say grow," said a Merrill Lynch report, forecasting 1.8 percent GDP growth for the next fiscal year to March 31, 2001.
"Importantly, the country's latest data confirms that a classic business cycle upswing is unfolding, right according to plan."
A similarly bullish report came from HSBC which described the capital expenditure rise as a "most heartening development."
It showed that capital investment had almost certainly hit bottom the previous quarter and was now on a cyclical recovery, helped by huge spending on information technology, said HSBC.
But some experts were not so sure.
"The upbeat assessment that greeted the March 13 release of the dismal October-December GDP report is confounding," said Commerzbank economist Ron Bevacqua.
Understandably, he said, the rise in capital expenditure had been greeted as a signpost for the economy's recovery.
But the recovery in capital expenditure had come on the back of wider profit margins, he said in a report.
"Wider profit margins, in turn, have been achieved through labour adjustment. This means capital expenditure is rising at the expense of wages and employment and therefore consumption.
"As a result, this time the recovery in capital expenditure may not be a leading indicator for the overall direction of private sector economic activity."
In fact, Bevacqua said, underlying consumption -- which was key to a full-blown recovery -- was still weak with spending falling 1.6 percent quarter-to-quarter in the three months to December.
The government is already splashing out with 18 trillion yen (164 billion dollars) in economic stimulus spending to offset languishing domestic demand.
But even bullish analysts said more money will be required.
Merrill Lynch warned of the deflation risk, with the so-called GDP deflator -- considered the best measure of inflation -- falling 1.5 percent in the latest figures.
"If sustained much longer, the combination of final goods price deflation plus cost-push inflation (from rising prices for imported oil and other commodities) could spell disaster for margins," it warned.
"Almost certainly it would force an added restructuring round."
Like other experts, Merrill Lynch urged the Bank of Japan to maintain its policy of keeping overnight interest rates close to zero percent to support the ailing economy.
But it also said the ministry of finance "should deliver another supplementary budget before end-summer, which is needed just to maintain fiscal thrust on an even keel."
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