International Insight.(the Japanese economy)

Hot Spots: Japan

Throughout this year, we have been warning clients that the optimistic assessments by leading denizens of Tokyo's political district, to the effect that the Japanese economy has entered a strong and self-sustaining recovery, should be taken with a grain of salt. Growth in business activity, we stressed, was carried mainly by governmental pump priming, so that by fall--when many of these programs run out--the economy would probably weaken again. As it turned out, the expansion of real GDP already in the second quarter was by a mere 0.2 percent, rather than the 0.9 percent initially estimated by the Economic Planning Agency (EPA). In the third quarter, GDP advanced at the same minute pace, an annual rate of only about 1.0 percent.

Private consumption was flat April to June, suggesting that there is no self-sustaining momentum in the economy. Government spending fell by 10.7 percent from the second quarter, as many big public works projects came to their conclusion, and others could not be carried out because local administrations lack the counterpart funds to keep them going. What kept GDP from falling into negative territory was mainly a marked up trend in company investment. This was primarily a response to strong demand for high-tech equipment. Outside the high-tech sector, companies find little to crow about. There are serious weaknesses in the chemical, steel, construction, property development and retail sectors. Car manufacturers are still doing well, but US demand, which has been essential for their growth, is now ebbing.

We would not be overly surprised to see the GDP number for the third quarter to be adjusted downward when it comes up for revision. The risk of a renewed slippage by the Japanese economy is clearly rising, if such a trend has not already begun. The government, of course, insists that the latest slow-down is likely to be temporary. The trouble is that statements were made to this effect too many times before. It is difficult to see where an impetus for more robust growth is to come from. Wages fell in the third quarter, and most Japanese companies, especially the larger ones, are under pressure to continue their restructuring. This means further pay reductions and more lay-offs at worst. There is little incentive for consumers to throw their proverbial caution to the wind and spend more, as the corporate bankruptcy rate remains high and occasional huge failures (such as that of the insurer Chiyoda Life, with the equivalent of some USD 27 billion in debts) serve as reminders that nobody's job is totally secure.

Criticism has sharpened of the Bank of Japan's decision last August to hike interest rates to 0.25 percent from practically zero. Undoubtedly, the BoJ will now come under intensifying pressure to reverse that step. If it lowered rates back to zero and loosened its already easy monetary policy further, it would probably be pushing on a string. It is highly doubtful that under present conditions such a reversal would do much to perk up business activity. IT investment appears to have peaked. Corporate capital spending may slow further as demand for electronics falls off in the softening economies of North America and Europe.

The banks are still ...