Is the sun about to set again on another Japanese dawn? (The Times)
Tuesday, December 14, 2004
business.timesonline.co.uk
Once more clouds are gathering over what had appeared to be brightening economic prospects in Japan. For the fourth time in little more than a decade, the land of the rising sun is confronting the painful deception of another false economic dawn.
For most of this year, hopes have been growing that, at last, the world’s second-biggest economy was dragging itself out of the quicksand of seeming perpetual semi-stagnation and persistent deflation.
In the first half of this year, Japan was able to celebrate two consecutive quarters of potent economic expansion. Spirits soared: finally, an end to economic misery was in sight.
Suddenly, however, this burst of optimism looks misplaced and, yet again, a new beginning for Japan looks at risk of turning into a false start.
Last week, the Japanese authorities published revised GDP figures. The news was bleak. An economic relapse reported already for the second quarter, with growth slowing sharply, is now shown to have seen a renewed bout of actual decline, with the economy shrinking again by 0.1 per cent.
In the third quarter the figures showed a meagre expansion of 0.1 per cent. Taken together, these numbers left Japan once more on the brink of technical recession — usually defined as two consecutive quarters of falling output.
Tormented Japanese policymakers might be forgiven for feeling that their economic history is trapped in a grim cycle of repetition — repeating itself first as tragedy, then as farce.
On three previous occasions since Japan’s asset price bubble burst at the start of the 1990s, hopes of an economic renaissance have been dashed.
In 1995 in a worryingly familiar scenario, recovery was scuppered as a slump in the dollar sent the yen soaring. Two years later a toxic combination of the Asian financial crisis, the failure of several key securities firms, and a startlingly ill-judged increase in Japan’s sales tax, put an end to another nascent upturn. And Japan’s luck was no better in 2001, when a US recession following the implosion of the dot-com bubble, and another policy mistake, with the premature end of Japan’s zero interest rates, once again throttled a revival.
Fourth time unlucky, then? Japan has achieved a very great deal over the past decade in pushing ahead with drastic corporate restructuring and eliminating the overhang of bad debts plaguing its banks. This effort ought to provide a stronger foundation for expansion. But the economic omens are not looking propitious.
For those inclined to take a rose-tinted view of this longed-for Far Eastern dawn, it was tempting to dismiss last week’s overhauled GDP data as a statistical aberration, resulting from the introduction of new calculation methods.
Unfortunately, however, it was the old, more buoyant growth numbers that were aberrant. Because Japan remains stuck in deflationary territory, falling prices mean that a given increase in its nominal output, in cash terms, translates into a larger rise in real, inflationadjusted, GDP — the usual measure of growth. But until now, the price measures used by Japan in estimating its real GDP growth dated from 1995. The new figures take as their baseline up-to-date prices from only the previous year, under the so-called chain-linking technique recently introduced in Britain. So, alas, the rejigged data are a more accurate depiction of the true state of the Japanese economy.
What, then, has gone wrong? Quite simply, as in past revivals, Japan’s present upturn was reliant on exports. Now, as foreign demand for Japanese products has fizzled in the face of weaker global activity and a strengthening yen, so the recovery has virtually stalled.
Hopes for a more sustained expansion had been pinned on a virtuous chain reaction as buoyant exports fuelled stronger industrial activity, spilling over into the rest of the economy via growing investment and profits, and so stimulating rising employment and wages.
In turn, the belief was that this would catalyse self- sustaining resurgence in consumer spending and domestic demand. However, it has not happened that way.
Instead, the third-quarter national accounts show that as export growth collapsed from 3.4 per cent in the previous three months to just 0.6 per cent, the economy ran out of steam. Consumer spending in the third quarter rose by an insipid 0.2 per cent.
The fear is that the virtuous chain reaction that the optimists had envisaged now operates in the opposite direction, with sliding exports triggering a renewed downswing.
The risks of this are growing, with demand from Japan’s two key overseas markets wilting. In the US, the autumn “soft patch” is so far proving more persistent than expected, while in China the Government is intent on engineering a slowdown to forestall the threat of an overheating economy.
China alone accounts for 12 per cent of Japanese exports, and Goldman Sachs estimates that its demand generated as much as a third of Japan’s 2.4 per cent growth last year.
Yet from an annual pace of more than 20 per cent in figures just a few months ago, growth in Japan’s exports to China has slowed to a rate of under half that. Japan’s overall world export volumes in October were only 5 per cent up on a year earlier. If the dollar’s slide continues to drive the yen higher, even this performance will be in jeopardy — not least since China’s yuan currency remains pegged to the greenback.
The consequences are evident already. In October, Japanese industrial production fell by 1.6 per cent from the previous month, and is now more than 1 per cent down year-on-year — its first annual decline since last autumn.
Analysts such as Ian Harwood, of Dresdner Kleinwort Wasserstein, believe that Japanese corporate profits have also peaked, threatening knock-on repercussions for investment, employment and, in turn, consumer activity. In October, the unemployment rate edged upwards once more, while the “economy-watchers” barometer of sentiment among ordinary Japanese has tumbled.
And this week is expected to bring more bad news in the Tankan survey of Japan’s big manufacturers.
Against this backdrop, there is the further danger that Tokyo’s decision-makers could once more prove complacent and commit serious policy mistakes. The Tokyo Government, beset by a national debt of 170 per cent of GDP, is contemplating the reversal of income-tax cuts in a move that would risk a repeat of the 1997 sales tax debacle.
And while the Bank of Japan is unlikely to abandon Japan’s zero interest rate regime any time soon, Mr Harwood notes that it has permitted growth of the money supply — a vital component of its anti-deflation strategy — to slow abruptly.
The dismissal of last week’s anaemic GDP figures by Toshihiko Fukui, the Bank of Japan’s governor, as a mere “temporary adjustment” is far from reassuring.
It is premature to write off this fourth attempt by Japan at a revival. It is too soon to say this is the end. But without good fortune and judgment, the prospect is that we are witnessing the beginning of the end.
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