The government’s projection for Japanese economic growth is 0.6 percent for fiscal 1999 and 1 percent for fiscal 2000. Both are based on unrealistic assumptions about the present and future state of the economy. The projection appears to have been verified by the negative GDP growth recorded in the last two quarters.
The pessimistic view is based solely on the sluggishness of personal consumption reported in the Household Income and Expenditure Survey. However, the survey is notorious for inadequate reporting of high-income families who are the sole beneficiaries of the 4 trillion yen cut in the personal income-tax that was introduced last April.
While the consumption of middle-income and low-income families, whose income is falling and who have not benefited from the tax cut, has been declining, high-income families, who have not only benefited from tax cuts but also from the rise in stock prices, have been rapidly increasing consumption — enough to compensate for the decline in the consumption of other families.
Family restaurants have not been doing too well, but business at restaurants in first-rate hotels has been increasing since May, when the effect of the tax cut was felt. Similarly, while sales at department stores and supermarkets have been slumping, business is up at the direct outlets of imported brand-name goods and discount stores that sell high-priced personal computers and digital audio outfits. The recent sales growth of high-priced cars — which contrasts with declining sales of low-priced vehicles — is another indication of the same trend. What is important is the two-digit increase in the price-weighted sales of all cars that marked the last two quarters.
Production in different sectors has been on the rise since April-June of last year. The index of industrial production increased by a whopping 3.9 percent and the index of the activity of the service-sector increased by 1 percent in July-September, bringing the weighted average of the growth-rate of 90 percent of the entire economy to 1.9 percent. Production continued to grow in October-December; for the combined industrial and service sector, growth hit 0.4 percent.
The Economic Planning Agency’s statistics show an overall contraction of growth 1.4 percent for October-December, which followed minus 1 percent growth in July-September. This was based mainly on the minus 1.6 percent growth in personal consumption that is based on the unreliable Household Income and Expenditure Survey. If it is true that consumption has declined while production is up, huge inventories should be piling up at stores and factories; in fact, there has been little reported accumulation of inventory.
The official figures of negative GDP growth in the last two quarters will not be checked until next month, as the EPA checks its figures only once a year.
Private investment in plant and equipment was back, contributing 0.7 percentage points to GDP growth. There were some negative factors such as negative growth of public capital-formation and net exports, but the combined contributions of factors other than private consumption was only minus 0.4 points. If the real contribution of private consumption was positive by a substantial margin, as indicated by the production figures and by the qualitative information on private consumption, then growth rates must have been positive for two consecutive quarters in the last year.
With all indications pointing to a still stronger showing in January-March, there is no reason to expect growth much lower than 3 percent for fiscal 1999, which is now ending. It reminds us of the 2.5 percent growth registered in 1995. Since investment in plant and equipment is already rising in October-December, investment-led growth of 5 percent, which will exceed the record 4.4 percent recorded in fiscal 1996, is foreseeable for fiscal 2000, particularly if the government is ready to introduce another permanent tax cut aimed at middle-income families who did not benefit from the tax cut in the past year.
The fiscal crisis has been much overplayed. Fears are based on the gross public debt of 600 trillion yen, and the fact that it is 130 percent of GDP. But as the government holds a huge amount of financial assets, the relevant figure is that of net public debt, which is one-fifth of the gross figure and its ratio to GDP is less than 20 percent, one of the lowest in the OECD countries.
So, the public debt ceiling does not actually exist, and the effectiveness of fiscal policy will have been demonstrated by 2 percent to 3 percent growth in fiscal 1999. The target rate of 2 percent growth in the intermediate-term economic plan of the government is based on an unrealistically low rate of technical progress, estimated from the growth in recession years. The real rate of technical progress should be no lower than the 2 percent registered in the latter half of the 1980s, particularly if we remember the impact of the information technology revolution that is taking place. The potential growth rate for the intermediate period should be at least 4 percent.
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