View from Tokyo: Going from bad to worse - and beyond

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The Independent Online
The Japanese economy has gone from bad to worse to terrible in the past two years.

The government has kept saying reassuringly that recovery is just around the corner but, just as predictably, the statistics have continued to show drops in output, lower capital goods spending, plunging consumer confidence and, with the high yen, disappearing corporate profits.

Now some economists are predicting negative growth for the Japanese economy for the current fiscal year. 'What comes after terrible?' some corporate planners are starting to ask.

Officially the government is still predicting 3.3 per cent gross national product growth this year. No one inside or outside Japan believes this for a minute. Jesper Koll, economist for SG Warburg in Tokyo, expects a contraction of 0.6 per cent for this fiscal year followed by a mere 1 per cent growth in the year starting next April and 1.9 per cent the year after that.

To be sure, industrialists are not sitting around bemoaning their fate. Companies are using the short-term pain to cut costs, reduce their bloated workforces by every possible means short of outright lay-offs and improve efficiency and competitiveness for long-term gains. Japan is far from entering a period of terminal economic decline.

But in the meantime people are screaming for the government to do something, anything, to get the economy moving again, and sooner rather than later.

Industrial production has been falling for 23 months without a break. Unemployment, now 2.5 per cent, is creeping up and the number of new jobs on offer is declining. Profits are set to decline for the fourth year in a row and in response companies are again planning to reduce capital spending.

At the same time the high level of the yen, which has appreciated by 20 per cent against the dollar this year, appears finally to have started to rein in Japan's huge trade surplus. The US government was widely seen to have talked the yen up earlier this year to put a stop to the spiralling surplus, expected to reach dollars 130bn- dollars 140bn ( pounds 85.5bn- pounds 92bn) this year.

Export cut

Although the signs are still early, the foreign ministry is now claiming that the surplus for the second quarter of this year was lower than for the same period last year. Many companies, most notably the car manufacturers, have already cut their exports since they are no longer able to make a profit in yen terms.

The yen now trades at 105-106 to the dollar, and Warburg calculates that only 3 per cent of Japanese exporters are profitable at any value stronger than 110 to the dollar.

Domestically there is little cheer, either. Despite a series of 'emergency spending packages' announced by the government in the past 18 months, the economy has refused to respond.

Part of this is due to a general lack of confidence among consumers, who are simply refusing to spend. Household savings are demonstrably rising - the average worker is putting 28.7 per cent of his income into savings, the highest rate in years even in savings-friendly Japan.

And part of the disappointment is due to the gap between the amount of public funds the government has promised to inject and the actual flow of money. Although the three emergency stimulus budgets announced a total of Y30,000bn ( pounds 187.5bn) in new spending, the amount that will actually be dispensed is likely to be closer to Y10,000bn.

Some of the gap is accounted for by book-keeping sleight of hand. And some is due to fiscal austerity imposed by the Ministry of Finance, which is experiencing a continuing drop in revenue from taxes and is terrified by the prospect of being forced into deficit spending.

The latest panacea that politicians and businessmen are pushing for is an income tax cut, again to the horror of the Ministry of Finance. Data from the national tax administration agency, showing that salaried workers are paying more income tax now than any year since 1957, has been given much publicity.

Last week the agency reported that a typical family of four with gross pay of pounds 29,636 last year paid pounds 1,127, or 6.53 per cent, in income tax. In 1989, when a tax reform was carried out, the ratio of income tax was 5.73 per cent.

Stashed away

But now some doubt is creeping in about the effectiveness even of a tax cut. Bureaucrats point out that with overtime payments continuing to fall, a tax cut might not make the average salaried worker feel any richer. And so spending might continue to languish as the tax rebates were stashed away with other savings.

Meanwhile, a Tokyo court has awarded a small victory to a discount store that is trying to take on the rigged retail system, which keeps prices artificially high.

Last week the Tokyo District Court said Shiseido, one of the country's leading cosmetics manufacturers, must ship products to a retailer that they have refused to supply since May 1990.

Shiseido has been under assault from several discount chains that claim the profit margins on 'recommended retail prices' are too high and keep customers away. In August this column reported on the discount chain Kawachiya, which has taken Shiseido to the Fair Trade Commission for trying to stop discount selling. That case is still under review.

In the latest ruling, Fujikihonten, a Tokyo discounter, claimed Shiseido was breaking a contract when it suddenly refused to supply it with products in May 1990.

The court said Shiseido should forward products worth Y510m that had been on order for the past three years. The presiding judge said Shiseido's aim was clearly to keep prices at artificially high levels, which infringed the anti- monopoly law. Shiseido said it would appeal because the ruling could lead to the collapse of the chain store system.

In fact this is precisely what is happening as Japanese consumers realise that they are paying too much to retailers under the thumbs of their suppliers. Shoppers are flocking to discount stores, which offer reduced prices either by bulk buying or by parallel importing of foreign goods.

With a government promising deregulation, and a Fair Trade Commission that in the past year has swung from protecting industry to representing consumers' interests, prices of goods in Japan may really start to climb down from their skyscraper levels.