Japanese Economy Shows Signs of Bottoming Out
By PETER LANDERS
Staff Reporter of THE WALL STREET JOURNAL
TOKYO -- Several fresh indicators suggest that Japan's battered economy may be bottoming out and could be on the verge of recovery -- although most likely a weak one.
Business inventories at their lowest levels since 1990, following a sharp reduction of the sort that typically presages a pickup in factory production. The main stock-market index is up 22% in just a month, putting Japan in a technical bull market, although analysts caution that government steps to prop up share prices are a big factor in the rally. And the country's monetary base is surging at more than 25% year on year. If the rise in this basic measure of money supply fails to put a dent in Japan's debilitating bout of price deflation, then a lot of economics textbooks might need rewriting.
Of course, Japan has already rewritten textbooks during its decade of decline, and it is too early to say that the business cycle is sure to recover. Banks are still the chief concern because of their gargantuan burden of bad loans. And a surge in bankruptcies -- such as the collapse Sunday of construction company Sato Kogyo Co., with 590 billion yen ($4.42 billion) in debts -- is likely to damp consumer sentiment and thus suppress household spending.
Big Boost
The stock market shrugged off that bankruptcy Monday, with the Nikkei 225 Stock Average recording its largest percentage gain in a year. The Nikkei rose 638.22 points, or 5.9%, to close at 11450.22, the highest level since Aug. 16. Traders cautioned that new government restrictions on short sales, essentially bets that stock prices will fall, accounted for part or much of the rise. But rising U.S. share prices and a brighter outlook for technology companies also helped spur demand for Japanese stocks.
"I think the recovery may already have begun," says Yuji Shimanaka, a veteran economist at Sanwa Research Institute. Mr. Shimanaka predicted the current recession and says the same leading indicators he used for that forecast, including world oil prices, now indicate recovery is on the way.
One big boost for Japan is the U.S. economy. Even the cautious U.S. Federal Reserve is predicting 2.5%-3% growth this year. That means more Americans will be buying Japanese cars, electronics and precision machinery.
Last week, Advantest Corp., a top measuring-instruments maker that sells most of its production outside Japan, said it expects to return to the black by the end of this year after big losses last year. Advantest Chairman Hiroshi Ohura said he is beginning to see bright signs such as a rise in semiconductor prices. Mitsubishi Motors Corp., which is trying to turn around under the direction of 37%-shareholder DaimlerChrysler AG, saw sales in the U.S. rise 30% in February.
"There's a much stronger global economy than we thought," says Frank Packer, economist at Nikko Salomon Smith Barney in Tokyo. Besides the U.S., two other important purchasers of Japanese equipment, South Korea and Taiwan, are showing stronger-than-expected growth.
Need to Boost Production
The bottoming out of corporate inventories also may help drive a recovery. The government reported last week that the index of industrial inventories fell in January to its lowest level since October 1990, suggesting that companies will need to increase production at the slightest upturn in demand.
More controversial is the Bank of Japan's huge boost to the money supply and the effect it will have on stopping price deflation, which is eroding corporate sales and swelling the real value of debts owed to banks. The central bank said Monday that base money grew 27.5% in the year ended in February, the highest rate of growth since 1974.
Base money, the easiest portion of the money supply for the central bank to control, includes cash in circulation and money held by commercial banks in accounts at the Bank of Japan.
Normally, a swelling monetary base would spur greater business activity by prompting companies and households to borrow more. That, in turn, would spur greater demand and firm up prices for goods and services.
Some economists believe Japan's boost in money supply has had little impact because banks are simply sitting on cash instead of lending it, and many people are stuffing money into safes or under the futon. Indeed, the most comprehensive measure of money supply, broadly defined liquidity, grew an anemic 2.7% in January from a year earlier, the most recent data show.
But Mr. Shimanaka and others argue that the Bank of Japan's policy of increasing the monetary base is helping the economy by weakening the yen, thus boosting corporate profits and exports.
Wasted Opportunity
Japan's gross domestic product contracted in both the April-June and July-September quarters of last year; most economists expect that figures due out this Friday will show a contraction in the October-December quarter as well.
Even if Japan finally is beginning to recover, that doesn't mean a recovery will be strong or lasting. In late 1998 and early 1999, the government stopped a financial crisis by injecting taxpayer money into banks and loading up on public-works projects. That produced growth of 0.7% in 1999 and 2.4% in 2000.
But Japan's leaders failed to use the opportunity to restructure the heavily indebted companies that are behind the banks' bad loans. Pretty soon the economy headed back into a deep recession. "It was a fragile recovery because it didn't fix the underlying problem," says Richard Jerram, economist at ING Barings in Tokyo. If a weak recovery causes the current crisis atmosphere to dissipate, many analysts believe Japan will again squander a chance to decisively address its banking-system woes, a step deemed essential to a sustainable comeback.
Messrs. Shimanaka and Packer also fear that the central bank will pull the plug on the recovery before it has a chance to get in high gear. "The lesson of the '90s is that the Bank of Japan has eased but hasn't eased long enough," says Mr. Packer, citing an ill-timed interest-rate increases in August 2000. "The BOJ can take back what it gives."
Many people are optimistic that Japan's economy will recover soon precisely because they don't expect the government to speed up reform.
A banking crisis or a spurt of big bankruptcies could send consumers into their shells, dealing a blow to economic output, but the recent government-backed bailout of Daiei Inc. by its banks suggests that's unlikely. Although Sato Kogyo went bankrupt, other big contractors are asking for-and are expected to get-Daiei-style bailouts. "It's a bit hard to see a domestic catastrophe," says Mr. Jerram.
As the U.S. example of the past few months shows, recoveries rarely happen all at once. They generally start with stray whispers of optimism rather than a chorus of good news. Mr. Shimanaka points to last week's issue of the respected business weekly Diamond. The magazine was full of bad news about struggling steelmakers and the like, but had a small column by the editor, buried apologetically on the bottom of the last page, noting that the price of steel, cardboard boxes and hamburgers is beginning to rise. In Japan, battered by price deflation, a bit of inflation would be extremely good news.
Write to Peter Landers at peter.landers@wsj.com.
Updated March 5, 2002 |
