The question is worth asking now, not just because there is a new government in Japan, but more because a small but growing group of people in Japan see the large current account surpluses as a danger to the whole economy. If these people start to have more influence on policy, which is possible given the change in government, then Japan may see it as no longer in its self-interest to run a current account surplus.
One can see the danger to the economy very clearly in the last few days. The more the yen is driven up, the harder it is for Japan to export products across the exchanges. Instead production is shifted abroad - Japan now has the capacity to make 2.5 million cars a year in the US, and in another five years may well be able to build a million more here. But that is a long-term solution, and one that may ultimately not be to Japan's advantage; in the short term, the higher the yen goes, the more Japan is pushed into recession.
The danger of a second dip in the Japanese recession has become very large. In the first quarter of this year the economy recovered sharply, showing an annualised 2.3 per cent growth, following three quarters of zero or negative growth. The second quarter of this year, however, probably slipped back into a decline, for new car sales, retail sales and industrial production all dipped below the floor that had apparently been established in the first three months of the year.
At present the official view, articulated for example by the Economic Planning Agency, is that recovery will resume. That is the majority view in Tokyo and it is reflected in things like the OECD forecast for Japan of modest overall growth this year. The minority view, however, is much more gloomy: that there is another sharp downturn on the way and, given the rise in the yen, not a lot can be done about it.
The pessimists' argument runs like this. Retail sales are depressed; personal income is falling; there has been an unusually long rainy season. Department store sales have been falling for 16 consecutive months and supermarket sales for 10. Even the much-hyped public investment boost will tail off in the second half. Worst of all, the squeeze on profits caused by the high yen will force companies to cut investment further. Any investment will tend to be abroad.
Meanwhile, in the car industry at least, there will have to be further cuts in Japan. Take Nissan, the second-largest car producer. Some months ago it announced plans to shut its Zama assembly plant. But that reduced its capacity by only 300,000. It has the capacity to build 2.9 million vehicles a year, but is actually producing little more than 2 million. It apparently plans to reduce capacity to 2.3 million by 1995, but that would mean cutting another plant the same size as Zama. Retrenchment has to go further.
The other car producers are in much the same position, for Japan is estimated to have 2 million excess capacity. Demand will not rise, for domestic demand is not going to repeat the 'bubble economy' boom of the late 1980s for a long while, and exports will continue to fall as overseas production builds up. The higher the yen the more domestic production needs to be withdrawn.
But as production falls so will jobs. Companies are pressing employees to accept either job losses or lower wages, with trade unions preferring the latter as long as prices are falling. As workers' wages fall, the country moves further into a deflationary spiral. The only way out, so the argument runs, is lower interest rates and a lower yen.
Whether or not this gloom is fully justified, it certainly fits in with yesterday's signals from the Bank of Japan that interest rates will fall, and with the warnings of the dangers of the high currency. But whether the foreign exchange markets will deliver a devaluation of the yen when Japan's current account is soaring upwards is quite another matter. For that to happen there has to be a fundamental change in policy in Tokyo: the Japanese authorities have to take steps to change the whole export bias of the country.
Here one leaves the realms of economics and enters those of politics and, more profoundly, national psychology. The idea that exports are good and imports should be discouraged is deeply ingrained in Japan, as is seen in the way in which the Japanese authorities instinctively claim that Japanese differentness makes it impossible to import foreign products: foreign beef does not suit the Japanese because their intestines are different, or foreign skis should not be imported because Japanese snow conditions are different.
Anyone who wants to can think up excuses like this. The change to look for is a genuine desire not to want to, to see that such a policy works against Japan's self-interest. There is as yet no consensus that policy should be changed: this is just a few of the more thoughtful people in Tokyo pondering the nature of economic policy for the next few years. But if recession deepens, and the yen appreciates still further, this is the change to seek: for Japan actually to want to cut its current account surplus, and not because the Americans tell it to do so.Reuse content