Asia Times: EDITORIAL: Japan to grow 5 percent in 2000? Hogwash!



	August 19, 1999	atimes.com

Japan

EDITORIAL: Japan to grow 5 percent in 2000? Hogwash!

At a closely watched press conference Tuesday following the release of the Bank of Japan's August economic report, bank governor Masaru Hayami repeated the central bank's message of caution regarding the current state and near-term future prospects of the economy: ''Although the economy has stopped deteriorating, a self-sustaining recovery in private-sector demand is not yet visible,'' he said for the nth time in recent months. He also reiterated intentions to continue the central bank's policy of keeping interest rates at effectively zero.

Some economists and analysts apparently are getting fed up with the litany and are beginning to question whether Japanese economic authorities may now be underestimating growth prospects much in the same way they underestimated the depth of the economy's troubles in 1997 and 1998. ''Increasingly we need to consider whether GDP growth in financial year 2000 will not be the 0.7 percent expected by the consensus, nor the 1.8 percent we have been forecasting, but something closer to 5 percent as a strong cyclical rebound takes place,'' was the comment of an ING Barings Japan economist.

What impels such pundits in their optimistic forecasts are not only the much higher than expected January - March growth figures, but also a recent minor upward revision of those numbers, higher machinery orders in June, higher capital spending in the real estate and transport and communications sectors, and continued improvement in business sentiment. Some also point to the ''wealth effect'' from stock market growth as motivation for their bullish predictions.

Well, we won't beat about the bush, but state our frank and direct reaction to such notions in one word: Hogwash!

The idea that sustainable recovery can be brought about by massive but unrepeatable public spending and some cyclical factors - light bulbs burn out, cars can only run so many thousands of kilometers, and washing machines conk out after a while - is just plain silly. BOJ governor Hayami or Economic Planning Agency chief Taichi Sakaiya are absolutely right in their pessimistic to cautious assessment of the economy and know full well that the process of corporate restructuring will take time and immediately will have a mainly negative impact on capital spending, employment and overall growth. They also know full well that business deregulation is only in its infancy and that the time when business start-ups become the order of the day and bring new dynamism to the Japanese economy lies in a still quite distant future. We have not been exactly hugely impressed with the economic policy acumen of Japanese officials over the years; but this time around, their cautious attitude is justified and then some.

Last fall, when a global liquidity crisis loomed, US Federal Reserve chairman Alan Greenspan made the decision to lower interest rates to inject much needed liquidity into the system. That easing of monetary policy turned the United States into global importer and liquidity supplier of last resort. It was as a result of that action that the East Asian economies were able to put a temporary halt to the decline of their as of now still largely unrestructured economies and unreformed industrial production structures. Export growth resumed and all-time low interest rates helped insolvent financial systems to draw back from the brink of bankruptcy.

But no-one should mistake a temporary uptake for longer-term sustainable recovery. Whether in Japan or elsewhere in East Asia - a few blips in industrial production recovery aside - the only indicators of economic improvement are in the nature of subjective sentiment derived from business surveys. Hard evidence of private sector investment and consumer demand is sorely lacking. Financial systems throughout the region are recapitalizing with taxpayer money and some foreign funds; but they are not lending. As long as these economies remain wedded to old paradigms of industrial production there is no-one to lend to.

After raising interest rates in June, the US Fed will likely raise rates again this month and in October. Then the new easy money games in East Asia will be over. If restructuring is not now accorded the highest priority, another economic downturn, not 5 percent growth, will be in store for Japan and the region.

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©1999 Asia Times Online Co., Ltd.