Japan: A boom without much bang

Posted in Japan | 12-Oct-06 | Author: Hisane Masaki| Source: Asia Times

TOKYO - The Japanese economy is on track next month to mark its longest expansion since the end of World War II, but nobody seems to be cheering. Instead, fears are growing of a slowdown in growth in the months ahead.

A key monthly government report on Thursday confirmed that the world's second-largest economy is still "recovering" after a decade in the doldrums, matching the longest postwar expansion of the 1960s, known as the Izanagi boom, which started a year after the 1964 Tokyo Olympic Games and ended with the 1970 Osaka World Expo.

The current expansion phase that began in February 2002 had already surpassed the 51-month-long "Heisei bubble boom" (December 1986-February 1991) in May. The government report predicted that the recovery will continue on the strength of ongoing domestic private-sector demand for a while. It now is almost certain that the current economic expansion will surpass the 57-month-long Izanagi boom (November 1965-July 1970) next month.

However, an official conclusion on the length of the current expansion must wait about a year before a Cabinet Office panel of experts can determine the actual peak of the economic cycle, as Japan defines the periods from peak to trough and from trough to peak as, respectively, recession and expansion. This is unlike the US system, under which a recession is defined as two consecutive quarterly declines in gross domestic product (GDP).

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. Unlike the previous booms, the current one is still anonymous, with no name - divine or otherwise - given yet.

In fact, the pace of growth pales before the hot-red ones registered during the previous booms. In addition, the benefits of the current boom have yet to filter fully through to small businesses, rural areas and households.

As Tuesday's government report acknowledges, there are potential risks to a continued expansion, such as growing signs of an economic slowdown in the United States, Japan's biggest export market. Personal consumption, a main component of economic activity accounting for about 55% of GDP, is also losing momentum. Japanese, along with European and Chinese, consumers will be called on to help sustain global growth as the US economy cools.

So people are becoming less certain about how long the Japanese economy will keep expanding. Some even say it may turn out to have contracted in the July-September quarter because of sluggish domestic consumption. Japan's economy grew 0.2% in real - or price-adjusted - terms in the April-June period from the preceding quarter. Preliminary figures for July-September are due out on November 14. Japan's economy last contracted in the fourth quarter of 2004.

A possible slowdown, if not the end of the boom, would pose a conundrum for the Bank of Japan, which is cautiously weighing the timing of its next rate hike after ending its unusual zero-interest policy of nearly six years in July. The central bank raised its target for the unsecured overnight call rate, which it uses as the key target rate in the short-term money market, to 0.25% from nearly zero.

Deputy BOJ governor Toshiro Muto said recently that the central bank has no set time for its next rate increase and will raise rates only gradually as long as the economy expands and prices climb. Governor Toshihiko Fukui has said much the same. In addition to growing signs of a slowdown in growth, recent declines in world oil prices may push year-on-year changes in the country's Consumer Price Index - which excludes volatile prices for fresh foods - back into negative territory temporarily.

The BOJ's nine-member policy board is expected to keep monetary policy unchanged at its two-day meeting ending Friday because its members believe the domestic economic data aren't strong enough to justify another interest-rate increase. Many market watchers now expect the BOJ to wait until some time next year before making another rate hike.

Meanwhile, even a possible hiccup in the economy could bode ill for Prime Minister Shinzo Abe and lawmakers from the ruling coalition led by his Liberal Democratic Party (LDP), who are counting on sustained growth to win crucial triennial elections for the House of Councilors next summer.

New record
The BOJ's ultra-easy monetary policy, which many called "abnormal", also played a major role in nursing Japan's economy back to health after being mired in prolonged doldrums after the "bubble economy" of the late 1980s burst.

Concerns over Japanese financial institutions have almost disappeared as the once-huge mountains of bad bank loans have returned to normal levels. Major companies have cleared away the rubble of the late-1980s bubble that had long weighed on their fortunes - excess debt, equipment and labor. They logged record profits for the third consecutive year during the fiscal year ended March 31.

Also, deflation - which had squeezed corporate profits and wages - now seems to be a thing of the past, although the government has yet to declare it officially over. The supply-demand gap (excess supply) that stunted the first two economic expansion phases after the end in early 1991 of the Heisei bubble boom was eliminated during the fourth quarter of 2005, meaning that demand outstripped supply for the first time in about eight years.

The weaker yen has also played a key role in the current Japanese boom. The yen has been trading at about 119 to the US dollar recently. The dollar is hovering around eight-month-high levels against the yen on speculation that North Korea's first nuclear test will prompt Japanese investors to buy what they perceive as safe-haven assets, such as US Treasury bonds.

To be sure, the value of the yen is about two times where it was when major economic powers agreed on the Plaza Accord in September 1985 to correct an excessively strong dollar. But the real effective exchange rate for the yen has been much weaker. The BOJ's trade-weighted measure of the yen's performance against major trading partners slipped to 101.3 in September, the lowest since the Plaza Accord, when the figure stood at 94.8 against the March 1973 base of 100. "The effective exchange rate shows the yen is very weak,' Economic and Fiscal Policy Minister Hiroko Ota said. "Temporary factors won't have a significant impact on that trend.'

Recent economic statistics have pointed to strength in corporate production and shipments. The BOJ's closely watched "Tankan" quarterly survey of business confidence released recently showed that confidence rose to a two-year high, with companies projecting strong earnings and capital spending. The survey showed that Japan's largest companies plan to increase spending 11.5% this fiscal year, which would be the fastest since the year ended March 1991.

Another recent report also paints a rosy picture of the current economic conditions. The key government gauge of the current state of the economy topped the boom-or-bust threshold in August for the fifth straight month. The index of coincident economic indicators registered 77.8%, the Cabinet Office said in a preliminary report. A reading above 50% is considered a sign of economic expansion and one below that percentage is seen as a sign of contraction.

Lackluster boom
To be sure, the current economic expansion has brought many positive results, but critics claim that any recovery that goes largely unnoticed and unthanked by the public should be written off as just an "official record". Why haven't many ordinary Japanese people realized as much benefit from the current boom as the talk of a new growth record suggests?

GDP has grown at an annualized pace of only about 2% on average in real terms during the current expansion phase. This growth rate is vastly eclipsed by the much faster rates logged during the past booms - 11-12% during the Izanagi boom and about 5% during the Heisei bubble boom. According to estimates by the Dai-ichi Life Research Institute Inc, the size of Japan's GDP increased 70.4% during the Izanagi boom and 24.9% during the Heisei bubble boom.

By comparison, the GDP had expanded by only 9.8% as of the end of last year in the current boom. Most companies and many households are said to gauge how well the economy is performing based on nominal GDP figures.

The benefits of the current boom have yet to spread fully to small businesses, rural areas and households. Although former prime minister Junichiro Koizumi is widely credited for beating deflation and turning around the ailing economy, critics say his laissez-faire, market-oriented structural-reform program has left the negative legacy of a widening gap in society, especially between rich and poor.

Statistically, the income gap did grow. Japan's Gini index - a gauge for measuring the degree of income inequality in a population - has been steadily on the rise for a long 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.

Be that as it may, 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. And most Japanese workers have not seen their wages rise during the current boom.

Land prices are one barometer of local economic conditions, and commercial land prices in Japan's major metropolitan areas are rising for the first time since their collapse in the early 1990s. Concerns about a "mini-bubble" have even been voiced amid soaring land prices in fashionable urban areas such as Roppongi and Aoyama in Tokyo. But land prices in many rural areas remain largely depressed.

Although companies have begun to add to their payrolls, a record high proportion of Japanese people - about a third of the total workforce - now work as "irregular" (temporary or contractual) employees, a status lower paid and more insecure than their regular colleagues. After years of slashing the number of regular workers in favor of irregular ones 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.

Despite record corporate earnings and an improving job market, wages earned by Japanese fell almost 10% between 1997 and 2005, an average cut of more than 400,000 yen, or US$3,400, Labor Ministry reports show. Japan's households kept themselves afloat during those years by spending money they would otherwise have put away for the future. As a result, the country's savings rate declined to 2.4% from 10.4%.

Potential slowdown
There are growing signals of a possible slowdown in the Japanese economy, with some analysts saying the economy is already in a soft patch.

According to the latest Tankan survey, large manufacturers forecast sentiment would drop by 3 points to 21 in the October-December quarter, reflecting growing concerns about a likely slowdown in the US economy. US economic growth slowed to 2.6% in the second quarter of this year from 5.6% in the previous three months.

The latest index of leading indicators - which predicts economic developments about six months down the road - also held below the boom-or-bust line of 50% for two consecutive months in August, sinking to 20% in August from 27.3% in July. The Cabinet Office indicated that the index - which consists of 12 statistics, including machinery orders and stock prices - may turn out to have stayed below 50% in September for the third straight month.

According to another Cabinet Office report released this week, Japan's machinery orders - a key barometer of corporate capital spending in the months to come - rebounded in August from their biggest drop in almost 20 years in July, rising a seasonally adjusted 6.7% to 1.08 trillion yen ($9.1 billion). But the rate of increase was less than widely expected by economists, reinforcing the view that capital spending may be moderating during the second half of this year.

Other recent reports suggest that consumer spending may also be sluggish in coming months. Household spending fell 4.3% in August. The government's consumption index for July and August averaged 107.15, compared with April-June's 108.6, and unless the index for September gains considerably, the overall quarterly average could be down from the previous period.

BOJ governor Fukui said in May that the driver of Japan's economic growth would gradually shift to consumer spending from corporate investment. But that has not yet happened. Consumption is weaker than expected, largely because of lagging income gains. Japanese wages still have not reversed their decade-long slide even with the country's economic expansion now in its 57th month. While businesses plan to increase their capital expenditures at the fastest pace in 16 years, higher costs for raw-materials and fuel make them reluctant to raise pay.

Even if salaries rise more quickly, many households may choose to rebuild savings rather than spend. Most Japanese are increasingly concerned about a possible sharp surge in social-security and tax burdens amid the rapid aging of society and declining birth rates. Last year, Japan's population began to decline for the first time since World War II. The country's working population had begun to shrink several years earlier.

Experts warn that the country's social-security systems, such as pensions, health care and nursing care for the elderly, will collapse unless steps are taken such as a significant increase in social-security contributions, a reduction in benefits, or a tax increase.

Japan's fiscal condition is still the worst among major industrialized countries. Total outstanding government debts, including bills, bonds and other types of borrowing, totaled 813 trillion yen ($7.06 trillion) at the end of last year, exceeding the 800 trillion yen mark for the first time. This translates into a 6.36 million yen debt per citizen. The current, fiscal 2006 government budget calls for 18.8 trillion yen in debt-servicing outlays. Of this amount, 8.6 trillion yen is for interest payments.

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 round of interest-rate hikes.

Abe faces calls to raise the consumption tax to finance rising social-security costs and stem an even further rise in government debts. Even some within Abe's own party, including former finance minister Sadakazu Tanigaki, advocate that the consumption-tax rate, now 5%, be doubled in the early 2010s.

While saying he "won't run from the debate on taxes", however, Abe has advocated cutting expenditures before seeking a tax increase. He has said the contentious debate over raising the consumption tax will have to wait until the latter half of 2007, after the Upper House elections.

Instead, Abe has set an aggressive target for real economic growth of no less than 3% a year. This target rate is higher than the government's revised forecast of 2.1% growth in the current fiscal year ending next March. "Without economic growth, we will be unable to take effective measures to reverse the trend of fewer children and reconstruct government finances," Abe said recently.
Abe has said his government will aim to achieve the target growth through tax breaks aimed at encouraging technological innovation in the private sectors, especially the information technology one, and thereby boosting productivity, a key condition for growth amid the rapidly graying - and even shrinking - population resulting from abysmally low birth rates.

The coalition between Abe's LDP and the New Komeito party enjoys a roughly two-thirds majority in the House of Representatives. Still, next summer's Upper House poll, in which half of that chamber's seats will be at stake, could affect his political fortunes. The Democratic Party of Japan, led by former LDP heavyweight Ichiro Ozawa, has promised to grab a majority of seats in from the LDP-led coalition as a stepping stone toward taking power in the next general election, due by September 2009 at the latest.

The consumption tax was introduced in 1989, but only a few months later, prime minister Noboru Takeshita was forced to resign. The tax rate was raised from the original 3% to the current 5% in 1997, after which consumer spending slumped and the country slipped back into recession. The LDP suffered a debilitating loss in the elections the following year, forcing prime minister Ryutaro Hashimoto from office.

Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economy. Masaki's e-mail address is yiu45535@nifty.com.