TOKYO - The Japanese economy is on track
next month to mark its longest expansion since the
end of World War II, but nobody seems to be
cheering. Instead, fears are growing of a slowdown
in growth in the months ahead.
A key
monthly government report on Thursday confirmed
that the world's second-largest economy is still
"recovering" after a decade in the doldrums,
matching the longest postwar expansion of the
1960s, known as the Izanagi boom, which started a
year after the
1964
Tokyo Olympic Games and ended with the 1970 Osaka
World Expo.
The current expansion phase
that began in February 2002 had already surpassed
the 51-month-long "Heisei bubble boom" (December
1986-February 1991) in May. The government report
predicted that the recovery will continue on the
strength of ongoing domestic private-sector demand
for a while. It now is almost certain that the
current economic expansion will surpass the
57-month-long Izanagi boom (November 1965-July
1970) next month.
However, an official
conclusion on the length of the current expansion
must wait about a year before a Cabinet Office
panel of experts can determine the actual peak of
the economic cycle, as Japan defines the periods
from peak to trough and from trough to peak as,
respectively, recession and expansion. This is
unlike the US system, under which a recession is
defined as two consecutive quarterly declines in
gross domestic product (GDP).
In Japanese
mythology, Izanagi and his wife Izanami are the
deities who created the Japanese archipelago and
its gods. In the current economic expansion,
however, many ordinary Japanese people do not seem
to be rendering thanks to any god. Unlike the
previous booms, the current one is still
anonymous, with no name - divine or otherwise -
given yet.
In fact, the pace of growth
pales before the hot-red ones registered during
the previous booms. In addition, the benefits of
the current boom have yet to filter fully through
to small businesses, rural areas and households.
As Tuesday's government report
acknowledges, there are potential risks to a
continued expansion, such as growing signs of an
economic slowdown in the United States, Japan's
biggest export market. Personal consumption, a
main component of economic activity accounting for
about 55% of GDP, is also losing momentum.
Japanese, along with European and Chinese,
consumers will be called on to help sustain global
growth as the US economy cools.
So people
are becoming less certain about how long the
Japanese economy will keep expanding. Some even
say it may turn out to have contracted in the
July-September quarter because of sluggish
domestic consumption. Japan's economy grew 0.2% in
real - or price-adjusted - terms in the April-June
period from the preceding quarter. Preliminary
figures for July-September are due out on November
14. Japan's economy last contracted in the fourth
quarter of 2004.
A possible slowdown, if
not the end of the boom, would pose a conundrum
for the Bank of Japan, which is cautiously
weighing the timing of its next rate hike after
ending its unusual zero-interest policy of nearly
six years in July. The central bank raised its
target for the unsecured overnight call rate,
which it uses as the key target rate in the
short-term money market, to 0.25% from nearly
zero.
Deputy BOJ governor Toshiro Muto
said recently that the central bank has no set
time for its next rate increase and will raise
rates only gradually as long as the economy
expands and prices climb. Governor Toshihiko Fukui
has said much the same. In addition to growing
signs of a slowdown in growth, recent declines in
world oil prices may push year-on-year changes in
the country's Consumer Price Index - which
excludes volatile prices for fresh foods - back
into negative territory temporarily.
The
BOJ's nine-member policy board is expected to keep
monetary policy unchanged at its two-day meeting
ending Friday because its members believe the
domestic economic data aren't strong enough to
justify another interest-rate increase. Many
market watchers now expect the BOJ to wait until
some time next year before making another rate
hike.
Meanwhile, even a possible hiccup in
the economy could bode ill for Prime Minister
Shinzo Abe and lawmakers from the ruling coalition
led by his Liberal Democratic Party (LDP), who are
counting on sustained growth to win crucial
triennial elections for the House of Councilors
next summer.
New record The
BOJ's ultra-easy monetary policy, which many
called "abnormal", also played a major role in
nursing Japan's economy back to health after being
mired in prolonged doldrums after the "bubble
economy" of the late 1980s burst.
Concerns
over Japanese financial institutions have almost
disappeared as the once-huge mountains of bad bank
loans have returned to normal levels. Major
companies have cleared away the rubble of the
late-1980s bubble that had long weighed on their
fortunes - excess debt, equipment and labor. They
logged record profits for the third consecutive
year during the fiscal year ended March 31.
Also, deflation - which had squeezed
corporate profits and wages - now seems to be a
thing of the past, although the government has yet
to declare it officially over. The supply-demand
gap (excess supply) that stunted the first two
economic expansion phases after the end in early
1991 of the Heisei bubble boom was eliminated
during the fourth quarter of 2005, meaning that
demand outstripped supply for the first time in
about eight years.
The weaker yen has also
played a key role in the current Japanese boom.
The yen has been trading at about 119 to the US
dollar recently. The dollar is hovering around
eight-month-high levels against the yen on
speculation that North Korea's first nuclear test
will prompt Japanese investors to buy what they
perceive as safe-haven assets, such as US Treasury
bonds.
To be sure, the value of the yen is
about two times where it was when major economic
powers agreed on the Plaza Accord in September
1985 to correct an excessively strong dollar. But
the real effective exchange rate for the yen has
been much weaker. The BOJ's trade-weighted measure
of the yen's performance against major trading
partners slipped to 101.3 in September, the lowest
since the Plaza Accord, when the figure stood at
94.8 against the March 1973 base of 100. "The
effective exchange rate shows the yen is very
weak,'' Economic and Fiscal Policy Minister Hiroko
Ota said. "Temporary factors won't have a
significant impact on that trend.''
Recent
economic statistics have pointed to strength in
corporate production and shipments. The BOJ's
closely watched "Tankan" quarterly survey of
business confidence released recently showed that
confidence rose to a two-year high, with companies
projecting strong earnings and capital spending.
The survey showed that Japan's largest companies
plan to increase spending 11.5% this fiscal year,
which would be the fastest since the year ended
March 1991.
Another recent report also
paints a rosy picture of the current economic
conditions. The key government gauge of the
current state of the economy topped the
boom-or-bust threshold in August for the fifth
straight month. The index of coincident economic
indicators registered 77.8%, the Cabinet Office
said in a preliminary report. A reading above 50%
is considered a sign of economic expansion and one
below that percentage is seen as a sign of
contraction.
Lackluster boom To
be sure, the current economic expansion has
brought many positive results, but critics claim
that any recovery that goes largely unnoticed and
unthanked by the public should be written off as
just an "official record". Why haven't many
ordinary Japanese people realized as much benefit
from the current boom as the talk of a new growth
record suggests?
GDP has grown at an
annualized pace of only about 2% on average in
real terms during the current expansion phase.
This growth rate is vastly eclipsed by the much
faster rates logged during the past booms - 11-12%
during the Izanagi boom and about 5% during the
Heisei bubble boom. According to estimates by the
Dai-ichi Life Research Institute Inc, the size of
Japan's GDP increased 70.4% during the Izanagi
boom and 24.9% during the Heisei bubble boom.
By comparison, the GDP had expanded by
only 9.8% as of the end of last year in the
current boom. Most companies and many households
are said to gauge how well the economy is
performing based on nominal GDP figures.
The benefits of the current boom have yet
to spread fully to small businesses, rural areas
and households. Although former prime minister
Junichiro Koizumi is widely credited for beating
deflation and turning around the ailing economy,
critics say his laissez-faire, market-oriented
structural-reform program has left the negative
legacy of a widening gap in society, especially
between rich and poor.
Statistically, the
income gap did grow. Japan's Gini index - a gauge
for measuring the degree of income inequality in a
population - has been steadily on the rise for a
long time, showing widening income disparity. But
some analysts, while conceding the widening
disparity, have suggested that the phenomenon is
not necessarily related to Koizumi's reform
programs.
Be that as it may, there has
been considerable disparity in the pace of
business recovery between larger and smaller firms
and also between big cities and the rest of the
country. And most Japanese workers have not seen
their wages rise during the current boom.
Land prices are one barometer of local
economic conditions, and commercial land prices in
Japan's major metropolitan areas are rising for
the first time since their collapse in the early
1990s. Concerns about a "mini-bubble" have even
been voiced amid soaring land prices in
fashionable urban areas such as Roppongi and
Aoyama in Tokyo. But land prices in many rural
areas remain largely depressed.
Although
companies have begun to add to their payrolls, a
record high proportion of Japanese people - about
a third of the total workforce - now work as
"irregular" (temporary or contractual) employees,
a status lower paid and more insecure than their
regular colleagues. After years of slashing the
number of regular workers in favor of irregular
ones to cut costs, however, Japanese companies are
beginning to hire more regular workers, amid the
ongoing economic recovery and an anticipated mass
retirement of baby-boomers in 2007.
Despite record corporate earnings and an
improving job market, wages earned by Japanese
fell almost 10% between 1997 and 2005, an average
cut of more than 400,000 yen, or US$3,400, Labor
Ministry reports show. Japan's households kept
themselves afloat during those years by spending
money they would otherwise have put away for the
future. As a result, the country's savings rate
declined to 2.4% from 10.4%.
Potential
slowdown There are growing signals of a
possible slowdown in the Japanese economy, with
some analysts saying the economy is already in a
soft patch.
According to the latest Tankan
survey, large manufacturers forecast sentiment
would drop by 3 points to 21 in the
October-December quarter, reflecting growing
concerns about a likely slowdown in the US
economy. US economic growth slowed to 2.6% in the
second quarter of this year from 5.6% in the
previous three months.
The latest index of
leading indicators - which predicts economic
developments about six months down the road - also
held below the boom-or-bust line of 50% for two
consecutive months in August, sinking to 20% in
August from 27.3% in July. The Cabinet Office
indicated that the index - which consists of 12
statistics, including machinery orders and stock
prices - may turn out to have stayed below 50% in
September for the third straight month.
According to another Cabinet Office report
released this week, Japan's machinery orders - a
key barometer of corporate capital spending in the
months to come - rebounded in August from their
biggest drop in almost 20 years in July, rising a
seasonally adjusted 6.7% to 1.08 trillion yen
($9.1 billion). But the rate of increase was less
than widely expected by economists, reinforcing
the view that capital spending may be moderating
during the second half of this year.
Other
recent reports suggest that consumer spending may
also be sluggish in coming months. Household
spending fell 4.3% in August. The government's
consumption index for July and August averaged
107.15, compared with April-June's 108.6, and
unless the index for September gains considerably,
the overall quarterly average could be down from
the previous period.
BOJ governor Fukui
said in May that the driver of Japan's economic
growth would gradually shift to consumer spending
from corporate investment. But that has not yet
happened. Consumption is weaker than expected,
largely because of lagging income gains. Japanese
wages still have not reversed their decade-long
slide even with the country's economic expansion
now in its 57th month. While businesses plan to
increase their capital expenditures at the fastest
pace in 16 years, higher costs for raw-materials
and fuel make them reluctant to raise pay.
Even if salaries rise more quickly, many
households may choose to rebuild savings rather
than spend. Most Japanese are increasingly
concerned about a possible sharp surge in
social-security and tax burdens amid the rapid
aging of society and declining birth rates. Last
year, Japan's population began to decline for the
first time since World War II. The country's
working population had begun to shrink several
years earlier.
Experts warn that the
country's social-security systems, such as
pensions, health care and nursing care for the
elderly, will collapse unless steps are taken such
as a significant increase in social-security
contributions, a reduction in benefits, or a tax
increase.
Japan's fiscal condition is
still the worst among major industrialized
countries. Total outstanding government debts,
including bills, bonds and other types of
borrowing, totaled 813 trillion yen ($7.06
trillion) at the end of last year, exceeding the
800 trillion yen mark for the first time. This
translates into a 6.36 million yen debt per
citizen. The current, fiscal 2006 government
budget calls for 18.8 trillion yen in
debt-servicing outlays. Of this amount, 8.6
trillion yen is for interest payments.
Possible sharp rises in long-term interest
rates are a deep concern for the government
because they would lead to a spike in government
debt-servicing costs. Therefore, the government
does not want to see any hasty round of
interest-rate hikes.
Abe faces calls to
raise the consumption tax to finance rising
social-security costs and stem an even further
rise in government debts. Even some within Abe's
own party, including former finance minister
Sadakazu Tanigaki, advocate that the
consumption-tax rate, now 5%, be doubled in the
early 2010s.
While saying he "won't run
from the debate on taxes", however, Abe has
advocated cutting expenditures before seeking a
tax increase. He has said the contentious debate
over raising the consumption tax will have to wait
until the latter half of 2007, after the Upper
House elections.
Instead, Abe has set an
aggressive target for real economic growth of no
less than 3% a year. This target rate is higher
than the government's revised forecast of 2.1%
growth in the current fiscal year ending next
March. "Without economic growth, we will be unable
to take effective measures to reverse the trend of
fewer children and reconstruct government
finances," Abe said recently. Abe has said his
government will aim to achieve the target growth
through tax breaks aimed at encouraging
technological innovation in the private sectors,
especially the information technology one, and
thereby boosting productivity, a key condition for
growth amid the rapidly graying - and even
shrinking - population resulting from abysmally
low birth rates.
The coalition between
Abe's LDP and the New Komeito party enjoys a
roughly two-thirds majority in the House of
Representatives. Still, next summer's Upper House
poll, in which half of that chamber's seats will
be at stake, could affect his political fortunes.
The Democratic Party of Japan, led by former LDP
heavyweight Ichiro Ozawa, has promised to grab a
majority of seats in from the LDP-led coalition as
a stepping stone toward taking power in the next
general election, due by September 2009 at the
latest.
The consumption tax was introduced
in 1989, but only a few months later, prime
minister Noboru Takeshita was forced to resign.
The tax rate was raised from the original 3% to
the current 5% in 1997, after which consumer
spending slumped and the country slipped back into
recession. The LDP suffered a debilitating loss in
the elections the following year, forcing prime
minister Ryutaro Hashimoto from office.
Hisane Masaki is a Tokyo-based
journalist, commentator and scholar on
international politics and economy. Masaki's
e-mail address is yiu45535@nifty.com.
(Copyright 2006 Asia Times Online Ltd. All
rights reserved. Please contact us about sales, syndication and republishing
.)
