The currencies must fall against something, right? Maybe Oil?
Japan already in deflationary spiral, economists say
12:20 p.m. Sep 10, 1998 Eastern
By Edwina Gibbs
TOKYO (Reuters) - Deflationary spiral -- it's a trap Japanese authorities say they cannot afford to slip into, but for many economists the world's second-largest economy has already fallen prey.
Japan's central bank cited fears of such a spiral -- in which falling prices hurt companies' profits, forcing production cuts, leading to fewer jobs and less income, which in turn depresses demand, causing more price falls -- as the main reason for its move Wednesday to ease credit for the first time in three years.
Economic Planning Agency Minister Taichi Sakaiya said earlier this week that Japan was on the verge of slipping into the deflationary trap. He blamed trouble in global financial markets and warned drastic steps might be necessary if the turmoil worsened beyond expectations.
But economists point to the numbers. Domestic wholesale prices are declining, production has been slashed for the past three quarters, unemployment has jumped since the beginning of the year and consumer spending is insipid at best.
''If this isn't a deflationary spiral, it's a pretty good imitation of one,'' said Brian Rose at Warburg Dillon Read in Tokyo. ''When you have everything going down at the same time, including prices and wages, this is it.''
Economists also say there is not a lot that can be done in the short term.
The central bank's decision to guide its overnight call rate -- the rate at which private banks lend to each other overnight -- to 0.25 percent from previous levels around 0.40 percent to 0.50 percent -- is expected to have only a very limited, if any, impact.
Economists fret that not only will the cut be ineffectual in the long run, it may also hint at a frazzled leadership acting in desperation.
''This is like downshifting in a car that is heading off a cliff,'' said Andrew Shipley, an economist at Schroder Securities Japan. ''You may get there slower, but you're still going over the edge.''
Japan's markets, which did not have time to react to the late evening announcement Wednesday, did not seem willing to give central bankers the benefit of the doubt Thursday. Instead, they reacted with all-too-familiar anguish.
Bond yields fell to historic lows, the yen resumed a slide that had appeared over and stocks more or less ignored the Bank of Japan's move and gave up ground.
With monetary policy already extremely loose, it was one of the few cards the central bank had to play. Fiscal policy has also loosened substantially, with the government promising at least 6 trillion yen ($44.4 billion) in income and corporate tax cuts.
Economists agree that only long-term policies aimed at restoring corporate profits will bring about a sustainable recovery, saying they do not expect a recovery for the next year and a half at least.
Further bad numbers, beginning with gross domestic product data for the April-to-June quarter, due Friday and widely predicted to show a contraction for third consecutive quarter, are also seen as inevitable.
Major companies have restructured since the early 1990s, but other sectors, most notably the banking industry -- burdened with a mountain of bad loans -- and small and medium-sized companies, are only in the early stages of a long painful period, economists said.
Corporate bankruptcies, especially among small to medium-sized firms, which account for around 80 percent of Japan's output and 70 percent of the work force, are at extremely high levels and are expected to keep growing.
Unemployment is also expected to climb higher after steep rises earlier this year.
While the jobless rate fell to 4.1 percent in July from 4.3 percent in June, the drop has been attributed to a rise in the number of people who have given up looking for work and are no longer registered as unemployed.
''If all the people who had given up looking for work were included in the jobless statistics, the unemployment rate would be 5 percent,'' said Osamu Katano, an economist at Nikko Research Center.
Copyright 1998 Reuters Limited. |
