Japan’s no-name economic boom

Posted in Japan | 05-May-06 | Author: Hisane Masaki

Hisane Masaki is WSN Editor Japan.
Hisane Masaki is WSN Editor Japan.
While there is growing talk lately of Japan’s economy logging its longest expansion since World War II, many ordinary Japanese do not feel their lives are as good as the economic numbers would imply.

A recent spate of upbeat economic data, coupled with record corporate earnings and the highest levels of stock prices in years, has left government officials and business leaders, as well as economists, increasingly convinced that the world’s second-largest economy is on a solid growth track. They now believe the current expansion will probably continue until at least this autumn and outlast the longest post-war expansion of the 1960s, known as the “Izanagi” boom, which started a year after the 1964 Tokyo Olympics and ended with the 1970 Osaka World Expo. The two events impressed the world with Japan’s full recovery from the ashes of the war.

Japanese Economy Minister Kaoru Yosano, for example, said recently that the current trend of growth would continue until the summer of 2007. Kakutaro Kitashiro, chairman of Japan IBM and head of the Japan Association of Corporate Executives (Keizai Doyukai), a major business lobby, also predicted recently that the current economic growth will turn out to be the longest postwar expansion.

The expansion trend has continued uninterrupted since February 2002 and has apparently tied the 51-month-long “Heisei bubble boom” (from December 1986 to February 1991) in April. If the current expansion continues until November, it will outlast the 57-month-long Izanagi boom (from November 1965 to July 1970).

The government's official analyses of business cycles are based on the outcome of assessments by an expert panel set up by the Cabinet Office's Economic and Social Research Institute. The final assessment about the start and end of a cycle usually comes about one year after it has ended. Until that assessment has been made, the official benchmark will be the Cabinet Office's Monthly Economic Report, which is based on a wide range of economic indexes, including housing starts, corporate capital spending, trade statistics and personal consumption. On April 13, the Cabinet Office maintained its upbeat economic assessment in its monthly report for the month.

In early April, the number of days that reformist Prime Minister Junichiro Koizumi has been in office surpassed the tenure of former Prime Minister Yasuhiro Nakasone, making the Koizumi administration the third-longest one since World War II, after those of Eisaku Sato and Shigeru Yoshida. After the burst in the early 1990s of the “bubble economy,” Japan had seen many changes of government until Koizumi took office in April 2001. Without an economic upturn, any government cannot survive for a long period, political pundits say. During the 1990s, the Japanese economy was mired in a prolonged stagnation that followed the burst of the bubble economy. Sato served for 7 years and eight months from November 1964 to July 1972, including the period of the Izanagi boom. He is the longest-serving Japanese prime minister to date in the post-war period.

In Japanese mythology, Izanagi and his wife Izanami are the deities who created the Japanese archipelago and its gods. In the current economic expansion, however, many ordinary Japanese people do not seem to be rendering thanks to any god. In fact, the current boom is still anonymous, with no name – whether divine or not – given yet. The Yomiuri Shimbun, the nation’s largest daily, recently published an editorial titled, “An unrealized recovery is just an unofficial record.” What differences are there between today and the period of the Izanagi boom? Why cannot many ordinary Japanese people feel as much benefits of the current boom as talk of a possible new record span of growth suggests?

Constellation of upbeat figures

Japan - a global player in East Asia.
Japan - a global player in East Asia.
Concerns over Japanese financial institutions have eased significantly as the once-huge mountains of bad bank loans returned to normal levels. Major companies have cleared away the legacies of the late 1980s bubble economy that had long weighed on their fortunes – excess debts, equipment and labor – and are expected to report another record profits for three consecutive years for the fiscal year ended on March 31. The average stock price on the Tokyo Stock Exchange (TSE) rose by about 40% in 2005. Reflecting the increasingly upbeat economy, the stock market also has continued to rise, with the benchmark Nikkei stock average reaching its highest level in six years to top the 17,000 mark on March 31, the final day of fiscal 2005.

Industrial output in 2005 posted its highest level since 2000. Unemployment declined for the third year in a row in 2005, to 4.4% from 4.7% in 2004 and from 5.4 percent in 2002. Jobless rate for February stood at 4.1 percent, the lowest in seven years and seven months. Wage raises offered in this spring's annual wage negotiations are believed to have been higher than last year. Amid the improving job environment, Japanese consumers are loosening their purse strings. The consumption propensity of Japanese wage-earning households, which is measured by the ratio of household spending to disposal income, registered its highest level in 15 years, at 74.7%, in 2005. Japan's gross domestic product (GDP) expanded for the fourth quarter in a row during the October-December quarter, posting robust 1.4% growth from the previous quarter and an annualized 5.5% growth in real terms.

Also, deflation seems to be nearing an end, at last. The core consumer price index (CPI), which excludes volatile prices of fresh foods, has been on the rise since last November. The Cabinet Office announced recently that the supply-demand gap (excess supply) was eliminated in GDP during the fourth quarter of 2005, meaning that demand outstripped supply for the first time in about eight years. In early March, the Bank of Japan (BOJ) made a significant policy change, scrapping its five-year-old “quantitative easing” and returning to a more conventional, interest rate-based regime, although it has vowed to keep short-term interest rates around zero “for some time.”

In late December, the Koizumi government projected modest economic growth of 1.9% in real terms in fiscal 2006, which started on April 1 – 1.5% from domestic demand and 0.4% from exports. It also forecast that the CPI will register a year-on-year rise of 0.5% and that the GDP deflator, which reflects general price movements, will inch up by 0.1% in fiscal 2006. As “various economic figures are all showing signs of improvement,” the Japanese economy is on track to grow by more than 2 percent this year, Economy Minister Yosano said recently.

There are some potential risk factors that could derail the current expansion, including possible sharp rises in interest rates as well as high oil prices and possible setbacks in Japan’s two major export markets – the United States and China. In the wake of the BOJ's lifting of the quantitative monetary easing policy, long-term interest rates have been edging up.

IBM Japan Chairman Kitashiro said recently that the current levels of long-term interest rates, at around 2 percent, will not have an immediate impact on individual companies. But any sharp rises in such rates would cause heavier interest payment burdens for people with mortgages and companies with debts. Many analysts expect the BOJ to begin to move toward higher rates as early as the summer.

Prime Minister Koizumi is to step down in September when his current three-year term as president of the ruling Liberal Democratic Party (LDP) expires. Some market participants predict that Koizumi will officially declare an end to deflation before stepping down in September. But such a declaration at an early date could be a double-edged sword for the government.

To be sure, it would enable Koizumi to bow out amid some triumph after declaring a victory over deflation. Beating deflation and nursing the long-ailing Japanese economy back to health would probably go down in history as the biggest accomplishment of his more than five years in office. But at the same time an early official declaration of an end to deflation would take a lot of political pressure off the BOJ. Taking its cue from such a government declaration, the BOJ might begin to raise rates at a faster pace than the government deems acceptable, some analysts say.

"Koizumi touts the current economic boom as a result of his government's strenious reform drive"
"Koizumi touts the current economic boom as a result of his government's strenious reform drive"
Possible sharp rises in long-term interest rates are a deep concern for the government because they would lead to a spike in government debt-servicing costs. Therefore, the government does not want to see any hasty interest rate-hike move by the central bank. Japan’s fiscal condition is the worst among major industrialized countries. Total outstanding government debts, including bills, bonds and other types of borrowing, totaled 813 trillion yen at the end of last year, exceeding the 800 trillion mark for the first time ever, the Finance Ministry said recently. This translates into a 6.36 million yen debt per citizen of the country. The ministry estimates that each rise of 1% in long-term interest rates could push up the government's debt-servicing cost by 1.5 trillion yen or more. The fiscal 2006 government budget calls for 18.8 trillion yen in debt-servicing outlays. Of this amount, 8.6 trillion yen is for interest payment.

Good old days?

Looking back to the 1960s, characterized by the highest-flying economy after the war, the so-called 3C products – cars, color televisions and “coolers” (air conditioners) – made big hits. In the 1950s, the so-called “three sacred treasures” – refrigerators, washing machines and cleaners – began to be widely used among ordinary Japanese households. These days, flat-panel televisions, DVD recorders and digital cameras are often referred to as “new three sacred treasures.” But any of them would not change the lifestyle of Japanese people as much as the 3C products or the three sacred treasures of the 1960s did.

As in the current boom, the Izanagi boom started after experiencing a final meltdown. Japan overcame the “1965 slump” that saw a government bailout of the now defunct Yamaichi Securities Co. The Izanagi boom also saw many mergers and acquisitions between major firms. Nissan Motor Co. and Prince Motors Ltd. were merged in 1966. Nissho Iwai Corp., now Sojitz Corp., was established in 1968 through a merger between Nissho Co. and Iwai Sangyo Co. Unitika was established in 1969 through a merger between Dainippon Spinners and Nippon Rayon. In 1970, Yawata Iron & Steel Co. and Fuji Iron & Steel Co. merged to form Nippon Steel Corp.

In the late 1960s, the average life expectancy of Japanese people was 69.2 years for men and 74.7 years for women, compared with 78.6 years for men and 85.6 years for women in 2004. People aged 65 or over accounted for only about 7 percent of the total population in the late 1960s, but now they make up 20 percent. Unemployment rate was only 0.7 percent in 1970.

In the 1960s, “Kyojin,” “Taiho” and “Tamagoyaki” were said to be the three most popular things among children. But “Kyojin” – the oldest Japanese professional baseball team Yomiuri Giants – has lost much of its erstwhile popularity, with TV viewer ratings of its games hitting record lows lately. “Taiho” is a “yokozuna” grand champion in sumo wrestling. He entered sumo in 1956 and rapidly rose through the ranks to become yokozuna in 1961. He is still generally regarded as the greatest sumo wrestler of the post-war period. But today, the traditional Japanese sport is not as much popular and is being increasingly dominated by foreign wrestlers. In the current rankings, a record five foreign wrestlers are in the top four ranks and a total 13 in the makuuchi division. The only yokozuna is Mongolian Asashoryu. “Tamagoyaki” fried eggs still remain highly popular, however. Japanese consumers each eat one egg per day on average today, compared with 0.64 in 1965.

The rate of business expansion in the current phase of recovery is much smaller than in the previous expansionary phases. GDP from fiscal 2002 to fiscal 2004 grew only about 1.7 percent per year after inflation, far smaller than the average annual GDP growth of 11 percent to 12 percent during the Izanagi boom or the average annual growth of about 5 percent during the Heisei bubble economy. According to estimates by the Dai-ichi Life Research Institute Inc., the size of Japan’s GDP increased 70.4 percent during the Izanagi boom and 24.9 percent during the Heisei bubble boom. But the size of GDP expanded only 9.8 percent by the end of last year in the current boom.

More important, growth rate in nominal terms, not in real terms, is said to affect ordinary people’s perception of the economic conditions. As deflation has lingered for a long period, they may naturally feel the economy is not performing as well as data on real growth rates suggest. In fiscal 2004, the latest year for which figures were finalized, Japan’s economy grew 1.7 percent in real terms, but only 0.5 percent in nominal terms. As for the just ended fiscal 2005, the government estimates growth rate at 2.7 in real terms but only at 1.6 percent in nominal terms.

Last, 2006 is the year of the Dog as was 1970 in Asian astrology, when the Izanagi boom ended. Some pessimistic people worry that the current boom may also end or at least lose much of its steam by the end of this year before many ordinary people have actually felt the expansion.

Anxiety for future

"Japan is forecast to shrink to half 70 years later."
"Japan is forecast to shrink to half 70 years later."
Furthermore, the benefits of the current boom have yet to filter through into small businesses, rural areas and households fully.

There has been considerable disparity in the pace of business recovery between larger and smaller firms and also between big cities and the rest of the country. Although unemployment has been tamed, record high percentages of Japanese people now work as irregular employees, a status lower-paid and more insecure than their regular colleagues. Most Japanese people are concerned about rising social security and tax burdens amid the rapid aging of society and declining birth rates.

According to the BOJ’s closely watched “Tankan” quarterly survey of corporate sentiment for March, released in early April, the key diffusion index (DI) for large manufacturers stood at plus 20 and that for large non-manufacturers plus 18. The DI for small and midsize manufacturers remained at a lackluster level of plus 7, while that for small and midsize non-manufacturers was stuck at an even lower level of minus 9. Business confidence figures are calculated by subtracting the percentage of companies reporting unfavorable business conditions from that of those reporting favorable conditions.

Land prices are one barometer of local economic conditions. According to a recent government survey, commercial land prices in Japan’s major metropolitan areas such as Tokyo, Osaka and Nagoya as of Jan. 1 increased for the first time in 15 years after the collapse of the asset price bubble. Some concerns have even been voiced over soaring land prices in fashionable urban areas such as Roppongi and Aoyama in Tokyo. In the nation’s capital, commercial land prices gained 2.8% while residential property gained 0.8%., with the greatest gains seen in Tokyo's Minato and Shibuya wards, where prices climbed 18% and 9.2 %, respectively. But as prices outside of metropolitan areas remain depressed, overall land prices across the country are still on the decline, falling 2.8 percent from a year earlier, although the pace of decline slowed for three years in a row.

Meanwhile, although Japanese companies have begun to add to their payrolls, record high percentages of people – about a third of the total workforce – are irregular employees who are paid less than their regular colleagues and whose jobs are more unstable. According to the Internal Affairs and Communications Ministry, the number of irregular works stood at 3.6 million in 2005, up slightly from 2004. The number of people in temporary work was about 1.06 million in 2005 – more than double the 2003 figure, which stood at 500,000. After years of slashing the number of regular workers in favor of irregular workers to cut costs, however, Japanese companies are beginning to hire more regular workers, amid the ongoing economic recovery and an anticipated mass retirement of baby boomers in 2007.

While Koizumi and other coalition politicians tout the current economic boom as a result of his government’s strenuous reform drive, many analysts attribute it more to years of painstaking restructuring efforts by private companies. Opinion polls also suggest that most Japanese people want the government to address the issues of rising social security and tax burdens, rather than structure reform of the economy.

Japan is at a historic juncture demographically, with the rapid aging of society and declining birth rates. Japan’s population began to decline for the first time after World War II last year, two years earlier than widely expected. Japan’s working population had already begun to shrink several years earlier.

If the current low birth rate continues, Japan's population, now 127.7 million, is forecast to shrink to half 70 years later and to a third 100 years later. Japan's total fertility rate – the number of babies born to every woman during her reproductive years – stood at 1.29 in 2003 and 2004. The government will soon release the 2005 rate, which is expected to hit a new record low of around 1.26. The percentage of people aged 65 or over has reached 20 percent of the total population, while that of children aged 14 or under has declined to 14 percent. Many Japanese are increasingly concerned about their future as their social security and tax burdens are expected to keep rising sharply.

A major reason for the falling birth rate is the growing trend of later marriages or not marrying at all. The average age at the first marriage in 2004 was 29.6 years for husbands and 27.8 years for wives. The average age when a woman gives birth to her first child was 28.9 years, versus 27.5 years in 1995. Marriages decreased for the third straight year to 720,429, or 19,762 less than in the previous year. Marriages per 100,000 people were 5.7, the lowest on record. Economic factors are most often cited as the primary reason why more and more Japanese get married in later life or choose – or are even forced to choose – to remain single. Working women in particular need or want to work, but it is not easy to make employment and child-raising compatible with each other because of the poor quality of social services for childcare, unfavorable employment practices and rigid working conditions.

According to a recent Cabinet Office survey, only about 40 percent of Japanese parents said that they wanted to have more children. Japan's willingness to have more children is the lowest among five countries surveyed, with the number reaching over 80 percent in Sweden. The other three countries surveyed are South Korea, the United States and France. Of the Japanese pollees who didn't want to have more children, 56 percent cited financial reasons for their reluctance. Meanwhile, 81.1 percent of Swedish pollees said they wanted to have more children, with the number reaching 81 percent in the US and 69.3 percent in France. “In those three countries, there are good child-support services and tax benefits,” a Cabinet Office official said. “I think that's the reason for the (high) birth rates.” In South Korea, 43.7 percent said they wanted to have more children.

A series of measures taken – and highly publicized – by the Japanese government in the past decade or so to reverse the declining trend has been a complete failure. Among those measures are the Angel Plan introduced in 1994 and the New Angel Plan introduced in 1999. Under those plans, wide-ranging programs have been implemented to encourage people to have children.

Critics point out that the government's measures taken to date have been almost useless. They even claim that the government has not been serious enough about the problem, citing the fact that 70% of the social welfare budget goes to programs for the aged, like pension and medical services for them, with only 4% set aside for services for children, such as child benefits and child-care services. The Japanese government’s education-related spending is also the lowest among industrialized countries in terms of its ratio to gross domestic product (GDP).

The demographic changes have alarmed government policymakers. Pressure is also growing, especially from the domestic industry, for the acceptance of more foreign workers.

In late April, the Council on Fiscal and Economic Policy, headed by Prime Minister Koizumi, released an interim report on the government's global strategy to reinvigorate the economy, which calls for the acceptance of foreign workers in fields that are not currently open to them in order to help maintain high economic growth in light of the low birth rate and the graying of society. The global strategy is to be finalized in May. It will be incorporated into the annual basic policy on economic and fiscal management and structural reform to be compiled in June.

According to the interim report, the government should review the types of jobs open to foreign nationals and allow greater flexibility to hire foreigners in service fields, such as the nursing care industry, as demand for workers in such areas has increased due to the graying of society. The report also calls on the government to establish a work environment that will attract more foreign workers. In mid-May, the council will draw up guidelines for a system to increase the number of foreigners employed in Japan.

The council's call to allow more foreigners to work in this nation highlights its deepening concerns over the possibility of maintaining high economic growth without allowing more foreigners to take up positions here. According to estimates by the Health, Labor and Welfare Ministry, in 2030, the number of workers will have decreased by about 10 million from the current labor force to about 56 million. The Cabinet Office also believes that as things stand, one in every 20 people would have to be employed in the nursing industry in 2030 in order to provide the current level of care.

But many Japanese are still concerned about a possible sharp rise in the number of foreign workers. They fear, among other things, that public security would deteriorate as the number of crimes committed by foreigners has been rising sharply in Japan. Echoing such concerns, Health, Labor and Welfare Minister Jiro Kawasaki cautioned recently against allowing more foreign workers to work here. Kawasaki said the government should expand employment opportunities for senior citizens, women and young men for the time being.

Kawasaki also indicated concerns that a rise in foreign workers would reduce employment opportunities and lower salary levels for Japanese. Experts point out that if the government decides to allow greater numbers of foreigners into the country, it must first take measures to prevent public discord or disorder that could result from cultural differences. The council’s interim report says the government will map out general guidelines this year for solving potential problems foreign workers might face, in areas such as health and education, as well as measures to prevent friction between Japanese and foreigners.

On April 30, one piece of bright news came from the Ministry of Health, Labor and Welfare, which said Japan's labor force – those currently employed or seeking work – rose to 66.54 million in fiscal 2005, up 150,000 from fiscal 2004 and marking the first increase in eight years. The gain came as the ongoing economic recovery encouraged women and retirees to re-enter the job market.

After falling to a recent low in fiscal 2002, 220,000 women joined the labor force over the next three years, bringing the total number of female workers to 27.52 million in fiscal 2005. Meanwhile, the number of those aged 60 or older who are either employed or looking for jobs reached 9.67 million in fiscal 2005, up 450,000 from five years earlier. The country's labor force is expected to remain under downward pressure, however, as the population of prime workers – those aged between 15 and 64 – will likely keep declining.

Furthermore, concerns about the flip side of Koizumi's reform drive, namely the widening disparity between rich and poor or between winners and losers, have been voiced broadly, even from within the coalition, as well as the opposition camp. Mikio Aoki, chairman of the LDP's caucus in the Upper House, voiced concerns early this year about a nation being polarized between “those in bright and [those in] dark skies” of society, with the disparity widening. Coalition partner New Komeito's leader, Takenori Kanzaki, also said early this year that “the distortion that may be called a ‘shadow' of progress in structural reform is spreading at the edge of Japanese society.”

Koizumi has denied the widening of a gap between rich and poor. But most Japanese think differently. According to a recent survey by the Yomiuri Shimbun, Japan’s largest daily, the public assessment figure for the performance of Koizumi and his cabinets over his five years in office stood at a record high 70 percent. But at the same time, nearly 60 percent of respondents thought the divide between the rich and the poor has widened because of Koizumi's structural reforms.

To be sure, the income gap did grow. The Gini Index readings – gauges for measuring the degree of income inequality in a population – have steadily been on the rise for a long period of time, showing widening income disparity. But some analysts, while conceding the widening disparity, have suggested that the phenomenon is not necessarily related to Koizumi's reform programs.

Takeshi Sasaki, professor of Gakushuin University in Tokyo, wrote in a recent newspaper article that in bygone days of high economic growth, opinion polls would consistently show 70 to 80 percent of the public considered themselves middle class. This led some analysts from abroad to comment, albeit sarcastically, that despite being officially touted as a free-market showcase, the Japanese economy should be called the most successful socialist economy in the world, he wrote. “A disintegration of the middle class seems to be happening – and the public knows it,” he wrote.

Be that it may be, the heating-up debate over the widening disparity in wealth has posed a serious question for Japanese people: what kind of society do they want? At the moment, it seems that many Japanese do not want to see their society become one in which once a person becomes a winner, he or she will always be a winner, and once a loser, always a loser.

Koizumi’s ruling LDP suffered a defeat in what was probably the last major election before Koizumi steps down in September. The largest opposition Democratic Party of Japan (DPJ)'s 26-year-old female candidate, Kazumi Ota, clinched a much publicized House of Representatives by-election in a constituency in Chiba Prefecture, adjacent to Tokyo, on April 23. The election victory gave a boost to new DPJ leader Ichiro Ozawa. Ota defeated a LDP candidate and three other contenders to become the youngest member in both houses of the parliament. In her campaign, Ota accused Koizumi of widening disparities in income, education and other aspects of society during his five years in power. She then vowed to work for a society that has “nobody left behind”.