Shocking quarterly slowdown in Japan's
economy By Richard
Hanson
TOKYO - "The economy is like a living
creature and needs further monitoring," minister of
finance Sadakazu Tanigaki said Friday after the
government reported a shock slowdown in the nation's
growth rate in the current quarter to an annual rate of
0.3% compared to 1.1% in the April-June quarter.
The only bright spot is that the figures reveal
that the economy achieved sixth quarterly growth in a
row. Consumer demand remained strong over the hot
summer, especially fast-selling electronic goods such as
big-screen televisions, in view of the Athens Olympics.
But there were dismal numbers for key supports of solid
growth - such as exports and capital spending by
companies - that might signal a slump ahead.
Officials also paint a gloomy picture in which
the long battle against deflation - the curse of falling
asset value - remains a threat at least in the near
future. The GDP deflator, which tracks price trends,
fell by 2.1% from a year before. This was lower than the
2.7% price fall in the last quarter, but it was also the
26th consecutive year-on-year fall. The Cabinet Office
said the smaller fall in prices was due to less steep
drops in the prices of semiconductors and
computers.
What this means is that deflation will
be over in 2006, but that is a long time from now, said
one economic analyst, who suggested that what may emerge
is a repeat of two earlier booms over the past decade.
In both cases, special factors produced an economic
upturn that soon faded. One came in the mid-1990s,
partly in anticipation of a higher consumption tax,
which created a consumption boom but soon collapsed amid
business and political uncertainty. The second economic
rally was stalled in part when it became clear that
Japan's post-bubble banking crisis was still alive and
kicking.
This time around, the dangers to the
economy are clear. Exports to the huge markets of China
and the United Stateshave already begun to be hurt.
China is committed to a policy of curbing inflationary
pressures in its fast growing economy and is tightening
up the cost of money. In the US, demand for machinery
and other goods - needed in fighting wars in Afghanistan
and Iraq - is slowing.
Other man-made factors
loom. One is Tokyo's overheated construction bubble. The
analyst warned: "In this bubble, the banks will not be
faced with troubled companies, but with problem
projects. This in turn will hurt the profits of banks
that have arranged for novel ways of financing
construction projects throughout the nation's capital."
Despite optimistic and confident words from
Japan's monetary authorities over the future of the
economy, there are some officials who see worrying gaps
in the behavior of investors in Japan. Bank of the Japan
Governor Toshihiko Fukui recently said on the slowdown:
"It is our overall judgment that Japan's economy has
been in a recovery process, leading to a sustainable
growth path. Rise in exports has raised industrial
production and corporate profit, which in turn generates
an expansion in fixed investment."
Other central
bankers, however, were less optimistic. One of them
pointed to the lack of progress in getting investors to
pump money into Japan's stock market, unlike the case in
2003 when it appeared the worst domestic bank crisis was
under control. Prices had then soared after the
government bailed out the country's fifth largest bank
group. These days, despite a favorable tax treatment,
investors seem content to keep their money in the bank
at near-zero interest rates (and keeping the national
savings rate around 6%).
For the time being,
there are many who are less optimistic and are not
willing to take risks, the central banker said. In the
private sector, there are also misgivings about the
course of the economy. But the consensus of professional
bank and security house analysts had appeared more
optimistic in their expectations of the July-September
quarter. Among the 14 private research institutions
polled by Jiji Press, the estimates was sharply higher
than the actual numbers announced by the Cabinet Office.
Their projections ranged from 0.4% to 0.7% growth.
According to Seiji Shiraishi, chief market
economist of Daiwa Securities SMBC Co, the latest GDP
report suggests the Japanese economy may be stalling,
rather than just slowing. "Exports and capital spending
not only stepped down as driving forces behind Japan's
economic recovery but they also became drags on growth,"
he said.
The unadjusted nominal numbers for
growth supports that view. These show that the economy
went up by 0.01% in July-September, or a year-on-year
growth rate of 0.045%. On a nominal basis, this was the
first rise in two quarters. Private consumption - about
55% of the economy - grew by a healthy 0.9% in
July-September. This marked six consecutive quarterly
increases, and was a bit stronger than the 0.8% growth
in the previous quarter.
Corporate capital
expenditures dropped by 0.2% after a 0.6% expansion in
the previous quarter. This was a result of lower
investment in construction and computer software. This
past summer also recorded a record number of typhoons
that cut into construction investment. Net exports
(exports minus imports) were down 5% - the first decline
in two years. Exports actually fell faster than imports
rose. The rise in exports slowed to 0.4% in
July-September from 3.6% in April-June. Automobiles and
consumer electronics exports to the US and Europe were
sluggish. Imports were up 2.7% as against 2.3% in
April-June.
The Cabinet Office still reckoned
that the official real economic growth forecast of 3.5%
for fiscal 2004 (which ends in March 2005) will be
realized if the GDP shows 1.3% quarter-on-quarter
growth. That is equivalent to a 5.2% annualized rise in
each of the two remaining quarters of the fiscal year.
Some think that's hard to reach.
But the
country's economic and fiscal policy minister Heizo
Takenaka suggests that there really is no change in the
economy's recovery trend despite its slow growth in
July-September. Takenaka said he has not changed his
view that the economy is in a small adjustment phase and
in the process of recovery. The government is pushing
legislation and tax policies that will not be popular
with the public, including increases in cuts in tax
breaks. These are the sorts of policies that could also
dampen consumer spending, and hence the prospect for
meeting the GDP growth target.
Richard
Hanson, veteran correspondent and expert on Japanese
economy, finance and politics, is the author of
Money Lords: The Pride and Folly of Japan's Finance
Ministry Elites.
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