The Japanese economy faces a bumpy road. Japan’s gross domestic product in the last quarter of 1999, October through December, shrank 1.4 percent from the previous three-month period, posting negative growth for two straight quarters. In annual terms, that works out to minus 5.5 percent, according to an Economic Planning Agency report released this week. The biggest reason for the fall is that consumer spending — which makes up about 60 percent of GDP — dropped as a result of reduced yearend bonus payments. The more general reason is the erosion of consumer confidence stemming from relentless corporate moves to restructure, in particular layoffs and pay cuts. This is a sure sign that the economy is going through a period of structural readjustment.
EPA Director General Taichi Sakaiya emphasized that the two consecutive quarters of negative growth was due to temporary factors and, therefore, should not be taken as an indication that the economy is sliding back into recession. He expressed confidence that the official growth target of 0.6 percent for fiscal 1999, which ends this month, can be achieved.
In fact, since the beginning of the year the economy has shown promising signs in some areas, such as production and corporate earnings. Now the EPA is reportedly inclined to take a more positive position in its forthcoming monthly economic report for March. On the face of it, the agency has good reasons to be optimistic.
For instance, the index of coincident economic indicators has stayed above the boom or bust line of 50 percent for the past seven months. Industrial production has also been climbing, thanks in part to the rebound in exports to Asian countries. Corporations listed on the Tokyo Stock Exchange are expected to register their first profit increases in three years for the year ending March 31. Business spending on new machinery and equipment, a big engine of growth, picked up in the October-December period for the first time in three quarters.
The government expects the economy to enter a period of self-sustaining recovery on the back of private demand in the second half of this year. Obviously it is counting on the 18 trillion yen “economic renewal” program to set the stage for an autonomous recovery. The hoped-for scenario goes something like this: First, production rises, leading to higher profits; the rate of factory use also rises, prompting producers to spend more money on new machinery and equipment. For workers, increased production means more work and more overtime. Employers hire more people to boost output further. Worker income grows, leading to higher consumption.
What appears to be happening now is that production is picking up and producers are beginning to consider buying new capital goods. Whether this will lead to a solid recovery remains to be seen. The downbeat view is that these signs of recovery, seen mostly in industries related to information technology, will fizzle out sooner or later. Here again we have to wait and see whether that actually happens. One thing is clear: The theory of across-the-board recovery — higher economic growth lifting all industries and businesses — no longer holds water.
The fact is that Japan’s economy must accept structural reform as economic globalization adds fuel to international competition. Inevitably, many businesses will be driven out of markets, either totally or partially, during this difficult transition. Perhaps the desirable recovery scenario is this: The information-technology industry provides the main thrust of growth, and then production and capital spending gradually expand on a wider front, boosting employment and consumption. That must be what the government and the Bank of Japan are hoping for.
There is no assurance, however, that things will develop this way, because corporate restructuring is likely to continue. What is more, many businesses will probably go bankrupt for reasons beyond their control, such as changes in the industrial structure and deregulation. The result may well be to retard, if not halt, the growth of worker income and consumer spending.
In the meantime, restructuring and bankruptcies will throw many people out of work. But developing new industries, which will absorb surplus labor, takes time. So, despite the growing signs of an economic upturn, the longer-term prospects are anything but reassuring. Even if the economy turns around in the second half of this year, as the government hopes, the recovery will be at best slow and moderate, with unemployment stuck at a high level.
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