Japan’s economic prospects are improving. After a decade of stagnation, the consensus forecast is that a fragile recovery will, with careful tending, continue. The emphasis belongs on “fragile,” however, not “recovery.” While the future holds many unknowns, the government can do its part to minimize the uncertainty. That means building a foundation for sustainable expansion, which, in turn, will stand on three elements: ending the excessive reliance on bureaucrats for economic leadership; replacing them with the private sector; and promoting the structural reforms that will lead to a fair and vigorous economy.
After a decade of stagnation, the indicators are positive. In a report released last December, the government forecast real growth of 1.0 percent for fiscal 2000 (which starts April 1). This follows a 0.6 percent expansion projected for fiscal 1999. For those who remember the go-go years of the 1980s, it is hard to get excited about those numbers, but coming on the heels of two consecutive years of recession — minus 0.1 percent in fiscal 1997 and minus 1.9 percent in fiscal 1998 — they offer reason to celebrate. Nor should we dismiss the statistics as hype: All major private think tanks are predicting two consecutive years of positive growth in fiscal 1999 and 2000.
But if the experts agree that there will be a recovery, they part company on its causes and its durability. Official projections that growth will pick up in the next year are disputed by private-sector analysts. The chief difference is the outlook for capital spending. The government expects that it will increase 1.4 percent, the first rise in three years. Some private think tanks forecast a major gain in business investment in information-technology equipment, citing strong demand for personal computers and telecommunications equipment. Others expect a continued decrease in capital spending, however, citing a 40 trillion yen-yen gap between supply and demand.
The outlook for consumer spending — another critical element of any sustained recovery — is also uncertain. Both the government and private think tanks anticipate a rise in such spending, but it is unlikely to be strong enough to lead the economic recovery, given the grim employment outlook and the small increase in personal income.
The outlook is further clouded by the prospect of economic restructuring. Even as new jobs are created, uncertainty in the labor force will increase. It is difficult to envisage a rise in consumer spending when workers are worried about their jobs. Furthermore, housing investment is expected to fall in fiscal 2000 following a boom in fiscal 1999, which was triggered by major tax breaks for home purchases and low interest rates.
If all that were not enough, international developments could also have a negative effect on the economy. The first worry is the foreign exchange market. The contrast between the anemic Japanese economy and the continuing boom in the United States means that the yen will likely remain weak against the dollar throughout the first half of fiscal 2000. In the second half, the yen could strengthen. There are several reasons for that: The relative prospects of the currencies will change as Japan’s recovery picks up and the U.S.’ slows down; Japan’s monetary authorities are likely to discontinue their near-zero interest-rate policy to keep the economy afloat; and U.S. criticisms of Japan’s trade surplus will intensify in the runup to the November elections. Any sharp appreciation of the yen could throw cold water on Japan’s economic recovery.
Crude-oil prices are another unknown. Experts have warned they could begin their long-anticipated recovery. While a strengthening yen would offset some of that cost increase, it would still give the economy a knock. No one knows if a fragile economy could handle the jolt.
In addition, there are long-term malignancies. Some bubble-related problems linger. The government’s reliance on fiscal-stimulus measures will impose a heavy financial burden in coming years.
There are encouraging signs for the economy, however. The banking crisis has faded, thanks to a massive infusion of public funds into shaky banks; corporate profits are expected to increase in fiscal 1999, posting the first gain in three years; stock prices are rising; and foreign economies are prospering, which means that Japan’s exports should remain strong.
A self-sustaining, enduring recovery depends on structural reform. That will require new thinking on the part of business and political leaders. The private sector must take the initiative and stop waiting for the government to take the lead; and the government must let it do just that.
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