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Strategies & Market Trends : JAPAN-Nikkei-Time to go back up? -- Ignore unavailable to you. Want to Upgrade?

To: Professor Dotcomm who wrote (1801)	3/23/1999 2:37:00 AM
From: chirodoc	Read Replies (2) \| Respond to of 3902

Asia-Pacific March 23 1999 JAPAN: A treadmill of growth and recession Gillian Tett reports that big government spending packages may not have a sustained effect This decade Japan's economy has seemed stuck on a depressing treadmill. Over and over again, the government has pulled the economy out of recession with spending packages - only to watch it splutter to a halt when the stimulus package came to an end. This spring, however, the treadmill is taking a newly dangerous turn. For in recent weeks some tantalising hints of recovery have emerged, leaving Keizo Obuchi, prime minister, cheerfully proclaiming an end to last year's recession. But though these upbeat signals have pushed the stock market sharply higher, most of this recovery still appears to stem from spending packages. And the danger now is that growth will splutter out again later this year - forcing the government to simply repeat this "stop-go" cycle. The fundamental problem is that there is still little evidence that the latest record ¥24,000bn (£126bn) spending package unveiled last autumn is in fact creating a self-sustaining recovery in the private sector. The gross domestic product data for last October-December period, for example, showed a startling annual growth of 10.6 per cent in the level of public sector investment. However, this was not matched by the rest of the data. Private capital expenditure, for example, dropped a record 17.2 per cent in this period, consumption fell 0.1 per cent, and even exports dropped by 6.2 per cent - leaving overall GDP down 3.2 per cent on an annualised basis. Since then, monthly figures have painted a brighter picture of private activity. Corporate bankruptcies have tumbled, and surveys of business sentiment have become less gloomy. Excess industrial inventories dropped 1.8 per cent between December and January, while industrial production rose 0.4 per cent, the second month of growth. There have also been hints of a stronger consumer sentiment. But for every sign of upturn there is still a sign of gloom. Exports remain very weak, capital expenditure is dropping and production in some leading sectors, such as cars, is still falling. On the consumer side, overall sales data from retailers remains depressed, strangely contradicting the household expenditure survey, which indicated spending was 1.4 per cent higher. Meanwhile, any upbeat data are often linked to government spending. Corporate bankruptcies have fallen because the government is extending huge, subsidised loans to small companies. The rebound in housing starts is similarly put down to the ultra-low, subsidised mortgage rates which the Housing Loan Corporation, the state lender, is offering. And a big factor for the surge in business confidence is that higher infrastructure spending is, in effect, bailing out the construction industry. The government insists that these caveats should not matter. If industrial production and consumption is indeed stabilising, this could still create a modicum of growth in the first half of the year, given that last year's data were so dire. But the danger will come when the ¥24,000bn spending package starts to run out in the middle of this year. The outlook for corporate investment is still extremely bleak, as most companies over-invested earlier this decade. "Overcapacity and low corporate profits will keep corporate expenditure on a downward trend," forecasts Brian Rose of Warburg Dillon Read, who fears that this falling investment could "slice nearly 1 per cent off gross domestic product in fiscal 1999". A second problem is that this corporate restructuring is also pushing up unemployment, limiting a recovery in consumer spending. Jeffrey Young at Nikko Salomon Smith Barney calculates that merely to restore labour productivity to the 1997 level, manufacturers must either reduce employment by an additional 5 per cent at the current output level, or boost production by more than 5 per cent. "We expect wage compensation to fall by 2.3 per cent in fiscal 1999, keeping real disposable income growth negative even with additional income tax cuts of ¥2,000bn to ¥3,000bn he said. In the short term the stock market may indeed be correct to celebrate a small economic rebound. In the long term, however, Japan's "treadmill" of growth and recession is becoming costlier with every cycle.