Signs that Japan's recovery may soon be under way
the Japanese economy
Tuesday 07 October 1997
Last year, a clear three years behind continental Europe and longer still behind the recoveries of the US and UK, Japan did start to achieve decent growth of 3.5 per cent, thanks in large measure to the sharp fall in the dollar value of the yen.
As the fall in the yen continued this year, giving a sustained impetus to exports, it seemed credible that this growth would at last be secure. But this year Japan has been hit by two blows, with a third in store. First, domestic growth collapsed after the increase in the sales tax from 3 to 5 per cent in the spring. Now its exports to East Asia have been threatened by the economic upheaval in the region. And soon, further planned fiscal tightening will hit domestic demand yet again.
As a result, all again is gloom: growth will probably end up little more than 1 per cent this year. While Japan's cohesive society has prevented the worse effects of slow growth showing through in day-to-day life - for example, unemployment remains in the 3 to 3.5 per cent range thanks to people withdrawing from the labour force as jobs dry up rather than signing on the register - relative economic failure has dealt an extraordinary shock to Japanese self-confidence.
The contrast is all the more marked when compared to the huge self-confidence a decade ago, manifested when the Japanese stock market alone resisted the Wall Street-led global collapse of share prices.
Yet at some stage the Japanese economy will recover. You can say that with confidence, not just because economies seem to be self-healing provided they are not dragged down by damaging economic policies, but because many of the structural and financial problems of the past are gradually being attacked.
Looking forward, there are the two present difficulties to be overcome. As far as domestic demand is concerned, no one really knows at what pace consumption will recover from that increase in taxation, just as hardly anyone predicted the damage that the sales tax rise would do. All past experience would suggest that consumption is one of the most stable of economic relationships, so it ought to bounce back later this year. But the evidence of that bounce, as yet, is thin.
On the East Asian shock, it is possible to be a little more positive. The pie-chart shows the destination of Japanese exports of goods last year. As you can see, the Asian region as a whole takes nearly half the total, 46 per cent, in fact.
But the four Asean countries which have been most severely hit by the present crisis, Thailand, Malaysia, the Philippines and Indonesia, account for only 12.4 per cent of Japanese exports. The rest goes to what seem at present to be more secure markets, such as Singapore, Taiwan and China itself.
Meanwhile, the western European and, in particular, the North American markets remain much more important. Of course there is a problem, and there will be more of a problem if Korea's present and unresolved difficulties break though into a collapse of growth. But Europe is going to be a goodish market for the next year and the problem would only become grave if there was a simultaneous sharp turn-down in the US.
And the fiscal tightening? Well, that has to happen. The fiscal deficit remains over 3 per cent this year and is projected to be only just under that level next. Japan may not be a signed-up member of the Maastricht pact, but Maastricht has set a new global standard. Actually Japan, more than any other country, needs to do better than the Maastricht 3 per cent as she has a more severe demographic profile than the other G7 countries.
A deficit represents borrowing from children and the unborn as they will have to pay back the borrowings when they are at work; Japan will have fewer people of working age proportionate to population than any other developed country in another generation's time.
So what are the reasons for hope? They come in two batches. One is the fundamental strength of Japanese industry at making things which the rest of the world wants to buy. Now that the yen is back to a reasonable level, you can see the Japanese trade surplus rising again; while this might be expected to lead to new trade frictions with the US, the US trade deficit is not principally a product of its trade with Japan.
As the other graph shows, the US trade deficit continued rising while the Japanese surplus fell back in 1996. HSBC, which pulled together these figures, takes the view that trade friction with the US will be a big issue through the autumn and winter, and that is almost certainly right. But Japan has learnt to live with trade friction before. The big truth remains that Japan has so diversified its production that it cannot be easily excluded from its markets, even if that were politically and practically possible.
The second batch for hope is that Japan is in the early stages of structural reform which will eventually revive the economy. People tend to stress the limited nature of the reforms being carried out: they say, for example, that the Japanese "big bang" is the palest shadow of the reforms of the City of London 11 years ago.
I think this misjudges the scale of what is happening. There is a great rethinking in Japan about its underlying competitiveness in the world: this embraces not just its tax system but much more fundamental things such as the emphasis its education puts on conformity as against creativity. Actually, there is plenty of evidence of creativity in Japan (fashion, Tamagochi), even though the country has not as yet been particularly successful in new boom areas like globally distributed software.
The benefits from this rethinking are not evident because it is a relatively recent phenomenon. But if it is successful, expect a new burst of Japanese growth in the next five to 10 years' time, driven by the creative thinking now taking place.
That does not solve this autumn's growth problem, of course. This is not going to be a good year. But next year should see growth of perhaps 2.5 per cent, not wonderful but acceptable. And once the markets catch a sniff that good times really are just around the corner, that will itself help sustain business confidence and hence growth. The turning-point? Maybe, in retrospect, we will look back at the second quarter of this year, when the increase in sales tax hit home, as the beginning of a gradual upward slope. Maybe.
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