Second/final part POLICY RESPONSE
In addition to measures the Ministry of Finance has taken to boost
the Japanese economy, primarily lowering interest rates, the
Japanese government has adopted a number of fiscal stimulus
packages. In 1992, the ruling Liberal Democratic Party and Japan's
leading business organizations grew concerned over the course of
the economy and fashioned two economic stimulus packages to boost
the economy. (For a detailed account of the measures the Japanese
government has adopted since 1991 to spark the economy, see
appendix B.) The five stimulus packages Japan has adopted since
1991 rely heavily on advancing public works projects ahead of
schedule and on making low-interest rate loans available to small
and medium-size businesses to spark an economic recovery rather
than on providing any new government spending. Indeed, critics
argue that the stimulative packages contain little, if any, real
new spending.
Also, as Japan's Nikkei index of stock market prices tumbled below
the 15,000 mark, the government intervened unofficially, but
unmistakably, by discouraging securities firms from selling
securities and by prodding pension fund managers into buying stocks
to shore up the stock market and to aid Japan's banking and
securities industries.(18) Japanese banks and securities firms
aided and actively participated in the stock and land speculation
because it enhanced their own asset bases.
18. Estimates indicate that the government has invested at
least 8 trillion yen ($70.8 billion) in public pension and
postal life insurance funds to shore up stock market prices.
Stock Slide Reflects Finance Ministry's Growing
Ineffectiveness With Business. The Nikkei Weekly, January 17,
1994. p. 5.
Japanese banks and securities firms own substantial amounts of real
estate and corporate stocks, which are counted as part of their
assets.(19) As stock and real estate values soared, the banks and
securities firms also saw their assets swell in nominal value,
which they then used to finance additional activities. When the
values of real estate and securities plummeted, however, securities
firms and banks saw their own asset bases shrink, placing much of
their core business activities at risk. Japanese banks were
pummelled further by rising defaults on many of the large numbers
of real estate loans they had made. Although accurate estimates are
difficult to obtain, some analysts estimate that Japan's banks
presently have roughly $260-$300 billion in bad real estate debts
to work off, with more debts accruing as the recession lingers.(20)
19. Institutional ownership of corporate shares, which are
rarely traded, accounts for about 65 percent of all
outstanding shares. Viner, Aron. Inside Japanese Financial
Markets. Illinois, Dow Jones-Irwin, 1988. p. 121.
20. Japanese Banks: Tough on the Taxpayer. The Economist,
February 26, 1994. p. 74-75.
As industrial production declined and businesses' inventories
mounted in 1993, government efforts to stimulate the economy
through public works construction projects and lower interest rates
proved ineffective. In three economic packages alone, the
government ostensibly pumped about $132 billion (about 3.5 percent
of nominal GNP in 1992) into public works projects, but the
shrinking size of the construction industry in the economy and the
dearth of consumer spending weakened most of the stimulative effect
of the spending.(21) Japanese banks, saddled with potentially huge
losses on real estate loans have been especially reluctant to
engage in additional construction loan activities (the major thrust
of all four stimulus packages). Also, the Finance Ministry has
effectively negated any fiscal stimulus by trimming down the
eventual size of the stimulus package from that announced initially
and by offsetting increased spending on construction projects with
reductions in the revenue it shares with local and prefectural
governments.(22)
21. Shinmura, Toshio. Can Bulldozer Fix Economy's Rough Roads?
The Nikkei Weekly, January 17, 1994. p. 3.
22. VanDenBerg, Jan. Japanese Stimulus: Truth and Advertising.
International Economic Insights, July-August, 1993. p. 4;
Revenue sharing from the central government accounts for about
40 percent of the revenues of local governments. See: Oishi,
Nobuyuki. Local Budgeting Awaits Word From Tokyo. The Nikkei
Weekly, January 31, 1994. p. 3.
Furthermore, the interest-sensitive sectors of the Japanese economy
--business investment, mortgages, and consumer spending--are
beset by a score of problems of their own. Businesses are unlikely
to pick up spending on new plant and equipment as long as the rate
at which they are utilizing their current plant capacity is low,
their inventories remain high, and demand for their products is
weak. Demand for mortgage funds increased during 1993, but land and
housing prices are still too high for most Japanese to afford,
despite the drop in real estate prices since their peak in 1990.
During 1993, the Japanese government offered two additional
stimulus packages to perk up the economy, and the Bank of Japan
lowered the discount rate two additional times to its current rate
(as of March 2, 1994) of 1.75 percent. In addition, in February
1994, the Hosokawa government adopted an additional package of
stimulus measures--the fifth since 1991. This package includes a
combination of one-time tax cuts, including a cut in personal
income tax rates, more public works spending, a small amount of
funds for aid to farmers, and an employment subsidy program.(23)
23. Shinmura, Toshio. Short-Term Boost Expected From Stimulus.
The Nikkei Weekly, February 14, 1994. p. 1.
A much larger income tax cut had been touted by business groups as
an antidote for the economic slump. Until mid-December 1993,
however, the Ministry of Finance had opposed any cut in income
taxes unless such cuts were linked directly to an increase in
consumption taxes to reduce the negative budgetary impact of any
change in income tax receipts. The Hosokawa government overcame
bureaucratic resistance from the Ministry of Finance and opposition
from other political parties by agreeing to adopt a rise in sales
taxes from 3 percent to 7 percent one year after the cut in income
taxes to pay for the tax cuts. While the package is not expected to
have a major impact on the economy, some analysts believe the cut
in income taxes will stop the economy from deteriorating further
until other forces, presumably business investment or consumer
spending, can kick in to move the economy out of recession.
OUTLOOK
Most forecasts currently estimate that the Japanese economy will
pick up in 1994. Business sentiment has turned decidedly negative,
however, and was more pessimistic in early 1994 than at any time in
the past 18 years.(24) As neither business investment spending nor
consumer spending have shown clear signs of reviving, private
research institutions in Japan have revised downward their
projections of Japan's real GDP growth in 1994 to the 0.3-1.6
percent range from forecasts above 2.0 percent earlier in the
year.(25) The Organization for Economic Cooperation and
Development (OECD), which had issued its forecast in September of
Japan's real GDP growth in 1994 of 1.4 percent, has revised its
forecast down to 1.0 percent real growth.(26)
24. Business Gloomy Despite GDP Uptick. The Nikkei Weekly,
December 13, 1993. p. 1.
25. Growth Projections Revised to 0.3-1.5% Range for Fiscal
'94. The Nikkei Weekly, November 29, 1993. p. 3.
26. Clifford, Bill. OECD Sees Fiscal Stimulus, Structural
Changes as Necessary. The Nikkei Weekly, December 6, 1993. p.
3.
A slow, drawn-out recovery for the Japanese economy augurs poorly
for any quick reduction in the bilateral merchandise trade deficit
with the United States and could impinge on the U.S. economy's own
recovery. As long as Japan's economy lumbers along relative to more
vigorous growth in the U.S. economy, U.S. exports to Japan likely
will continue to stagnate, while strong U.S. demand will pull in
more imports from Japan. The Clinton Administration is pressing
Japan to do more to spur its economy beyond the tepid fiscal
policies it already has adopted; however the continued appreciation
of the yen may do more to trim the bilateral deficit than any
bilateral negotiations. Although the reaction has been delayed and
slow, Japan's continuing current account (exports and imports of
goods and services) surpluses are causing the yen to appreciate
against the dollar. While yen appreciation inflates the
dollar-equivalent value of Japan's trade surplus, the volume of
Japan's exports are being negatively affected by the higher yen and
likely will continue to fall, curbing the current account surplus.
The present recession is affecting some institutions in Japan that
have characterized the post-war economy. Confidence by businesses
and others in the government's ability to handle the economy has
been shaken. This loss of faith is especially noticeable regarding
the Bank of Japan over its handling of monetary policy and the
Ministry of Finance, whose reputation has been badly bruised over
its handling of the financial industry, its implication in various
financial scandals, and its dogged resistance to any fiscal
stimulus measures that may entail increased deficit financing.(27)
27. Ito, Takatoshi. Losing Face? The International Economy,
May/June 1992. p. 46-49.
Furthermore, the Ministry of Finance and the Economic Planning
Agency (EPA) are being criticized for their unrealistic economic
forecasts, which have seemed geared more toward presenting a
favorable budget forecast (i.e., one that does not rely on the
issuance of deficit-financing bonds) than on offering a credible
assessment of the economy.(28) The EPA's official forecast for
FY94 (Japan's fiscal year runs from April 1st to March 31st), for
instance, projects that Japan's real gross domestic product will
grow by 2.4 percent. Most Japanese economists consider this
forecast to be more of an unofficial "target" than an actual
forecast.(29)
28. How Bureaucrats 'Fix' The Numbers. The Nikkei Weekly,
January 31, 1994. p. 5; and Iida, Mihoko. Fiscal '94 Real GDP
Growth? Government Projects 2.4 %. The Nikkei Weekly, February
14, 1994. p. 2.
29. Iida, Fiscal '94 Real GDP Growth? Government Projects
2.4%, p. 2.
The relationship between firms and their employees, characterized
especially by the lifetime employment system, is being challenged
as firms seek ways to trim their work forces.(30) Most firms have
released their part-time and contract workers and have taken other
measures that major Japanese firms typically follow during economic
slowdowns, including: reducing hours and bonuses; extending
vacations; reassigning individuals to other jobs; and encouraging
early retirement. The government has even subsidized firms not to
lay off employees. Despite these measures, the continued economic
slump is forcing firms to target parts of their core, white-collar,
predominantly male workers for layoffs. These moves likely will
push Japan's unemployment rate above the current 2.9 percent and
dampen consumer spending, but they could make the labor market less
structured over the long term.
30. Schlesinger, Jacob M. Japan Begins to Confront Job
Insecurity. The Wall Street Journal, September 16,1993. p.
A10.
Other Japanese economists believe that as the Japanese economy
recovers from recession, it will find world economic conditions
less amenable to the type of fast-paced growth Japan experienced in
the 1980s. For one, these economists argue that a recovery based on
a rapid, short-term expansion in exports is not feasible,
considering the attention accorded Japan's merchandise trade
surpluses by its trading partners and the high value of the yen.
Also, other fast-growing Asian countries, especially China, will
take some of the potential export growth from Japan. In addition,
Japan is experiencing the 1088 of parts of its manufacturing base,
which are relocating to China and elsewhere to escape the price
effects of the high yen.
Another factor that could impede Japan's potential economic growth
is the limits of technological innovation, since, by most accounts,
Japan is no longer in a position of technological catch-up.
Changing attitudes on the part of Japanese consumers, who have
become more prone to seek out discount prices, the lack of a
driving industry spurring domestic economic growth (principally
business investment spending), and a decline in the Japanese labor
force after 1996 all augur for a slower, rather than a faster, rate
of economic growth over the long term.(31)
31. Low Growth Era Seen After Recession. The Nikkei Weekly,
January 17, 1994. p. 3.
gwjapan.com
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Interesting that raising interest rates was beleived to have caused the collapse.
Jack |
