Asia Times: EDITORIAL: That confounding Japanese economy



	June 15, 1999	atimes.com

Japan Economy

EDITORIAL: That confounding Japanese economy

Can you believe it?! The Japanese economy grew at an annualized rate of7.9 percent in the first quarter (1.9 percent quarter-on-quarter), withconsumer and public spending (up 1.2 percent and 10.3 percentquarter-on-quarter, respectively) but also private capital expenditure (up2.5 percent) leading the way. Twenty-eight private economists polled by Bloombergjust before the release of the January-March GDP figures by the EconomicPlanning Agency on Thursday had come up with a consensus forecast of 0.1percent quarterly growth.

The results will shield Prime Minister Keizo Obuchi and his entourage fromharsh criticism as they attend the upcoming Cologne (Germany) G-8 summit.Whether they also indicate that Japan, in severe recession since late 1997,is now on a sustainable path to recovery is another question.

First off, the January-March GDP figures are difficult to square with aslew of other figures also just out: Private machinery orders dropped 13.8percent in April from March. New vehicle sales, traditionally a barometerof consumer sentiment, fell 10 percent in May from the same month a yearearlier. Bank lending fell 5.4 percent in May, also year-on-year. Retail salesfell by 0.5 percent in the first quarter. Unemployment, now at a recordhigh of 4.8 percent, is expected to keep climbing.

Those numbers, though merely spot indicators, show that neither privateinvestment nor consumer demand has really turned the corner. They show that lastyear's massive deficit spending (in combination with government loanguarantees for small and medium-sized businesses) made the principaldifference. Lastly, those figures show that first quarter growth looked so good simplybecause the fourth quarter 1998 base figures were so miserable. No one inhis right mind will make full-year 1999 growth projections based on thefirst quarter showing.

Still and all, it would be wrong to just pooh-pooh the January - Marchresults and say, well, it's all just public money recycled. Kicking theeconomy into higher gear, after all, is the purpose of deficit spending andwas the intent of the stimulus packages. Contrary to the consensus opinion of economists, those practitioners of the dismal science, it has worked.

The obvious issue now is how to keep it going and assure that one-offstimulus effects will give way to self-sustaining private-sector-led growthin coming months.

(Incidentally, the immediate sharp bond market decline in response to the EPA's GDPannouncement shows that at least one substantial portion of investorsbelieves that there is momentum: They had bought bonds with low yields onexpectations that interest rates would remain extremely low amid acontinuing economic slump. Now they are not so sure, reckoning that if theeconomy is to recover, the Bank of Japan will have no reason to keep itsnear-zero interest-rate policy.)

Corporate restructuring and downsizing, accompanied by more job cuts,notwithstanding, we believe sustained recovery is manageable, for thesereasons:

* Negative consumer sentiment in response to additional job losses will be offset, atleast in part, by the ambitious - but, happily, not overly expensive -measures to create 750,000 public-sector and private-sector jobs announced by theObuchi cabinet on Friday.

* Measures to improve corporate competitiveness (also announced on Friday)are by and large the right stuff, focusing on a wide range of businessderegulation.

* Already enacted tax cuts for individuals and corporations and taxincentives for housing construction will make a noticeable impact as theyear goes on.

* Expected substantial improvements in corporate profits as the result ofrestructuring will lead to some recovery of capital investment towardthe year's end.

An additional plus, though less tangible, will be the enlargement of thecurrent LDP/LP coalition through inclusion of New Komeito, giving thegovernment comfortable majorities in both houses of parliament and allowingmore rapid legislative action and response on the economic front.

All in all, then, and with the noted cautions, we see it the way the TokyoStock Exchange has reacted: it ain't great, but it's a whole lot betterthan it was last fall and we're ready to buy into it.

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