Growth gap gapes at Japan
By Richard Hanson

TOKYO - First, there was a preliminary report by the ministry of economy, trade and industry (METI) that said in October the seasonally adjusted production index for the mining and manufacturing sectors - industrial production index, in short - fell 1.6%, marking the second monthly fall in a row after September's 0.4% decline. Then officials reported that the jobless rate rose to 4.7% from 4.6% a month earlier. Both differed widely from what private analysts and economists had anticipated. So what happened?

Peter Morgan, senior economist at HSBC Securities in Tokyo, calculated that maybe a third of the decline in production can be blamed on natural disasters, such as the typhoons and the devastating earthquake that hit Niigata prefecture. The main economic logjam, however, still lies in the electronic sector, including problems such as excess inventories in PCs, flat screens and mobile telephones. "The numbers that we have show roughly two-thirds of the decline in production was due to the electronic sector - both electronic parts and information and communications equipment," Morgan told Asia Times Online.

The October result was far weaker than the median estimate by 10 research institutes surveyed by Jiji Press, a Japanese news service. Their forecasts ranged from a drop of 1% to a rise of 1.5%. Likewise, economists surveyed by the United States-based Dow Jones Newswires had expected the jobless figure to remain unchanged from 4.6%.

Japan's industrial output in October declined more than expected by many economists, deepening concern about the outlook for production activities that have led Japan's economic recovery. Economics minister Heizo Takenaka himself admitted getting the "anticipation" wrong. "Honestly speaking, there was a big gap between expectations and the actual figures," Takenaka said. While forecasts for industrial production for November are high, he said, "we will need to carefully watch whether the expectations are met". But he added, "Basically the economy is adjusting within an upward trend."

What economists are grappling with is how to interpret the uncertainty of the factors influencing economic behavior. The consensus seems to be that exports are the critical factor for the continuation of Japan's economic growth. There were six consecutive quarterly increases through the July-September period, according to the latest government measures. Revised calculations, however, cast doubt on those numbers.

Exports to China hold the key to future export vigor and Japan's economic performance in coming weeks and months. "I've argued for some time that exports are the critical factor for the continuation of the recovery at this stage...so we have to keep watching that sector," said Morgan. So far, exports to China have held up.

At least one government economist still sees a chance that the economy will not fall off its current "platform" of business activity. "Exports are seeing signs of rise - not a very sharp one, though - and gaining in some of the heavy industry exports to China," he said. The government is also looking at some "positive" domestic factors that are leading prices higher; a sign that several years of damaging deflation are nearing an end. Prices are going up, including those of fresh vegetables and eggs. And the Japanese are traveling again, especially to South Korea.

However, it is unlikely that government policy - including a squeeze on fiscal spending - will change very much until there are serious signs that the economy is beginning to slow, or at least has entered a turning point. Some private sector economists predict that Japan's economy has already come to the end of what has been a six-quarter expansion, supported partly by exports to China and the US.

"There are no strong props in sight," said Philip A Jones, an economist for Fitch Ratings, which rates bank and sovereign debt. Jones sees no strong replacement for the boost that exports to China provided. In his scenario, exports will definitely slow down.

Two earlier periods of recovery cycles following the bursting of the late 1980s investment "bubble" ended that way. From the mid-1990s, the economy was propped up once by heavy government spending and again by over-optimistic anticipation of an early resolution of the banking industry's huge overhang of non-performing loans.

According to Jones, "The downward cycle may not be a so severe this time." The polls of economists have reckoned a positive side. The Jiji Press survey on October's industrial production performance anticipated a smaller decline too, which has left many economists even more concerned. Now the worry is that the economy has already peaked as far as industrial production based on the October indicators are concerned. A recent government survey of manufacturers, who dominate Japan's total industrial output, has forecast their production will rise 3.7% in November and then fall 2.2% in December. That is already happening, hence fears that the peak came early.

Just two weeks ago, economics minister Takenaka went on record saying it is hard to follow the numbers put out by the government, let alone what any private economists may calculate. For one thing, the government can adjust its methods for compiling its numbers. For example, the gross domestic product (GDP) numbers announced for the July-September quarter showed an annual rate of growth of only 0.3% on an annual basis, a shocking drop from 1.1%. Soon afterwards, a new calculation showed a negative figure for GDP.

The government is still maintaining a "bullish view" on the economy even though Japan's real GDP is predicted to have shrunk in the July-September quarter with the adoption of a new GDP data calculating method. With the new method, which will be adopted from the last revised data for the quarter due out December 8, the cabinet office projects the country's real GDP growth in the term to shrink by an annualized 0.1% - the first economic contraction in six quarters - against 0.3% growth, as earlier reported. The new system is aimed at improving the accuracy of the GDP deflator, which is the primary barometer for inflation or deflation.

As for the October industrial production, the ministry of economy, trade and industry (METI) kept its view that Japan's production is leveling off, citing the firmness in steel and some other sectors and the expected recovery of auto makers, whose production activities slowed due to a one-off factor. Output of electronic parts and devices, including semiconductors and liquid crystal display components, skidded 6.2% while mobile phones, personal computers and other information and communications gear saw a 5.1% drop.

The electronic parts and devices sector "is experiencing adjustments," METI said. The inventory index fell 0.7%. The electronic parts and devices sector saw its inventories increase, but the rise was more than offset by a steep fall in automobile inventories.

Takenaka, however, can draw comfort from external agencies that forecast that the Japanese economy would expand moderately in the coming years. The Paris-based Organization for Economic Cooperation and Development (OECD) expects Japan's economy to expand 2.1% in 2005 and 2.3% in 2006, measured by price-adjusted real GDP. This marks a deceleration from the 4% growth predicted in 2004.

"The economic expansion in Japan remains on track, though at a more moderate pace as a result of a slowdown in export growth," which reflects in part "a weaker demand from China," the OECD said. "While growth has reached a plateau, this reflects the normalization of an exceptionally strong recovery rather than the start of a downturn."

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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