The latest government report on Japan’s gross domestic product — that the economy in the first quarter of this year expanded 1.4 percent from the previous quarter, or at an annual rate of 5.7 percent — has met with some skepticism. The general feeling appears to be that it is too good to be true. In fact, there is as yet no real sense of recovery despite the official announcement that the economy has “bottomed out.”
This is the first time in 12 months that the GDP — the total output of goods and services – has increased from quarter to quarter. In fiscal 2001, which ended March 31, the growth rate was minus 1.3 percent, slightly below the official target of minus 1 percent. Over the past decade, since the burst of the stock market and real estate bubble, the economy has zigzagged, punctuated by three recessions.
Widespread skepticism now seems warranted given the continuing lack of strength in domestic demand. One-half of first-quarter growth came from exports. Foreign sales of autos and electronic parts such as computer chips and display panels surged thanks to recovery of demand in the United States, Asia and elsewhere.
By contrast, business capital spending, a key engine of growth, continued to shrink. Although the pace slowed, the annual rate topped minus 10 percent. The slump in private housing demand also persisted. By and large, the corporate sector appears extremely wary of investing in the future.
It is true that consumer spending — which makes up nearly 60 percent of the GDP — increased at an annual rate of more than 6 percent. But there is little evidence to suggest a revival of consumer confidence. It is more likely that spending was spurred by temporary factors, such as medical payments for influenza and hay fever and advance apparel purchases due to the earlier-than-usual arrival of spring.
Admittedly, consumer spending statistics are often liable to wild fluctuations because they are compiled from limited samples of data. So the first-quarter surge could be a case of statistical overshooting. If that is the case, the 1.6 percent gain should be taken with a grain of salt. However, the fact that it followed a robust 1.9 percent rise in the previous quarter might yet signal a slight pickup in consumer psychology.
The prevailing view of private economists is that the economy bottomed out in the January-March period and is now treading a slow recovery path, judging from more recent indicators published since April, such as industrial production. The big question is whether this nascent recovery will lead to sustainable expansion in the months ahead. At the moment, the answer is anything but certain.
What has supported the recovery is largely the growth of demand from the United States, Japan’s largest export market. But the U.S. economy is showing signs of cooling off, even if temporarily. Here at home, consumer sentiment remains weak as wages continue to stagnate. Depressed companies are concerned more about cutting costs and jobs than about investing in new machinery and equipment.
The fact is that the economy is still struggling to get rid of its postbubble problems. So far it has performed by fits and starts, with an expansion followed by a recession. It entered an upswing twice, between November 1993 and May 1997 and between February 1999 and October 2000. The government must do everything it can to make it sure that the expansion now under way does not fizzle out again.
Its options are extremely limited, however. It cannot, and should not, try to stimulate growth by the conventional method of priming the pump: increasing public works investment. Having spent a staggering 130 trillion yen building roads, bridges and the likes over the past decade, Japan is now the most heavily indebted of the major industrialized nations. It is a shame that the nation’s international credit ratings are now in the same league as those of some developing countries.
The crushing public debt effectively rules out a government-led recovery. Inevitably the private sector must take the lead. After all, private demand-led recovery is the best way to achieve sustainable growth. But this does not mean that the government — and, for that matter, the Bank of Japan — should sit on the sidelines. Fiscal and monetary authorities must do everything reasonably possible to promote private-sector initiative.
For example, research and development and investment tax credits now being considered by the Council on Fiscal and Economic Policy to help bolster business competitiveness represent a step in the right direction. And, of course, structural reforms, including cleaning up the banking mess, must be continued with determination and perseverance.
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