The Bank of Japan’s latest quarterly “tankan” survey of business sentiments, conducted in September, provides further evidence that the Japanese economy is slowly recovering from its worst postwar recession. Leading the recovery are large corporations riding the crest of the information-technology revolution.
The confidence index for large manufacturers has improved for seven consecutive quarters, with the percentage of those that believe the business condition is “good” exceeding the percentage of those that believe it is “bad” for two straight quarters. This is shown partly by upward revisions in their capital spending plans for fiscal 2000.
The overall picture is mixed, however. The nonmanufacturing sector, particularly the retail business, remains in the doldrums, as evidenced by stagnant consumer spending. Even in the pace-setting big-business manufacturing sector, the mood is expected to improve only mildly in the October-December quarter. Generally, the recovery lacks strength. What is more, world economic prospects are now clouded by uncertainties such as higher oil prices and slowdowns in the United States, Europe and Asia.
Prime Minister Yoshiro Mori, who has made economic revival a top priority, has given the green light to a new stimulus package exceeding 10 trillion yen in project value. However, an extra budget now in the works promises to be more of the same, with public investment of the conventional type providing the main thrust of growth.
It has been almost a decade since the asset-inflated bubble economy collapsed. In this period, the U.S. and Japan, the world’s largest and second-largest economies, followed sharply different paths.
Here in Japan, the yen’s rapid rise earlier in the decade weakened the domestic industrial base, as the nation’s leading manufacturers — including carmakers, electronics firms and machine-tool producers — shifted production to low-cost locations abroad. The banks that had lent money freely in bubble days — mainly on the security of ever-appreciating land — were left holding huge amounts of bad loans as the land and stock markets went into a tailspin. Banks and brokerages, large and small, went bankrupt. As a wave of layoffs swept corporate Japan, unemployment hit a postwar record.
In the meantime, U.S. manufacturers have been restructured in dramatic ways. Most significant is the rapid development of IT-related industries, which are now leading not only domestic growth but the world economy as well. The U.S. economy continues to enjoy the longest boom in its history, as demonstrated by an unprecedented bull market in New York that is supported by a streak of strong corporate earnings.
In addition, U.S. economic prosperity, combined with the end of the Cold War, has brought a huge bonanza in the form of a large budget surplus. By contrast, Japan’s public finances are in a shambles, with the national debt — the sum of outstanding government bonds and borrowings — exceeding 500 trillion yen, which is almost equal to the nation’s gross domestic product.
After the bubble burst, the government put together a large stimulus package almost every year in an effort to get the economy back on track. Only in three of the past 10 fiscal years — 1991, 1996 and 1997 — did it do without an extra spending budget. In both fiscal 1993 and 1998, two extra budgets were compiled. All this entailed deficit financing on an enormous scale. The additional spending in fiscal 1998 alone involved more than 18 trillion yen in new bond issues.
These debt issues are like morphine. The drug eases pain temporarily, but if overused, it will cause addiction and even death. The lesson, of course, is that it must be used with utmost caution. In the same vein, deficit financing stimulates the economy temporarily, but if continued on a massive scale, it will weaken, not strengthen, the economy in the long run.
The Japanese government, it can be said, has administered heavy doses of “morphine” to the economy over the past decade to alleviate the pain of severe recession. In the process, the debt has snowballed, creating a fiscal mess of unprecedented proportions and weakening the nation’s economic competitiveness. Yet the government is set to prepare yet another large deficit-spending package.
Curing the addiction to borrowing requires bold structural reform. For that, efforts must be increased to clear up banks’ remaining bad loans and to shake out debt-ridden construction firms that depend heavily on public-works projects. At the same time, it is necessary to promote IT-related projects through cooperation between public and private sectors and to accelerate and broaden the ongoing process of deregulation.
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