View from Tokyo: Japan becomes 'less energetic'

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The Independent Online
FEW politicians anywhere in the world feel undue pressure to be rigorously honest in assessing their economies during a downturn. But Japan's leaders have of late become masters of understatement in their circumlocutions about the supposed 'adjustment phase' of the Japanese economy.

On Thursday the Economic Planning Agency announced that gross domestic product had contracted by 0.4 per cent in the quarter to September, following a 0.2 per cent contraction in the quarter before that - the textbook definition of a recession. But yesterday, Kiichi Miyazawa, the Prime Minister, implied that the figures were merely an unfortunate blip in a graph that is otherwise surging upwards, following the government's projections for 3.5 per cent growth for the next four years.

'We cannot help but say it is difficult to reach the 3.5 per cent goal at this moment,' the unperturbed premier said after a cabinet meeting.

Kozo Watanabe, the Minister for International Trade and Industry, dutifully maintained the cautious tone of understatement of his boss. Although stock inventories had gradually begun to fall, he said, 'private consumption and corporate capital spending remained less energetic'.

The 'less energetic' economic performance is the worst in Japan for nearly 20 years - the last time the country suffered two successive quarters of negative growth was during the oil shock of 1973-4. And although the government is affecting an Olympian attitude of indifference to the country's economic woes, business leaders, private economists and foreign governments are becoming increasingly anxious about the lack of official concern.

All the indications are now dark. This week, official figures showed that the ratio of job seekers to job offers had fallen below one for the first time in four years - meaning there is a shortfall of work available for those looking for a job. Unemployment is still just 2.2 per cent, but companies have cut back drastically on overtime and part- time workers. Paul Sommerville, senior economist for Jardine Fleming in Tokyo, predicts that over the next 12 to 18 months 3 per cent of the manufacturing workforce will be cut, despite Japan's cultural aversion to laying off workers.

Corporate sales and profits also look grim. According to a survey by the Nihon Keizai Shimbun of 1,554 listed firms, average pre-tax profits for the fiscal year ending next March are likely to fall by 22 per cent, with sales contracting by 4.6 per cent. This will be the third successive year of falling profits - the first time this has happened since the Second World War. The survey also showed how quickly companies see the economy deteriorating - in a similar survey two months previously, the estimated fall in profits was put at just 11 per cent.

Meanwhile bad news continues to build up from the nation's banks, with their mountains of bad debt, which they still refuse to fully own up to. Last week the 11 city banks reported an average decline of 37 per cent in pre-tax profits for the first half of the fiscal year. The figures would have been even worse had not a decline in interest rates allowed banks to boost their lending margins, giving them a temporary windfall in their day-to-day banking business. But these gains were more than offset by losses on banks' holdings of securities and increased loan-loss reserves.

Against such a background, economists say the government's passive stance is baffling. The Economic Planning Agency has still not officially abandoned this year's target of 3.5 per cent growth, even though it would take double digit growth in the next two quarters to achieve. 'Of course it is rubbish - everyone is lying,' a senior executive of one of the big car producers said. 'We don't see anything improving for another year.'

'I can't see what is holding them back,' said Matthew Berlow, economist for Credit Lyonnais. 'For international reasons as well, they should be doing more to stimulate the economy, to stop the growing trade surplus.' With the low level of domestic demand, imports have been tumbling, and in an otherwise bad year Japan is going to find itself with a record trade surplus in the range of dollars 110bn (pounds 70bn).

One of the most effective measures the government could take, Mr Berlow suggested, would be a cut in personal income taxes - a move that many companies have been calling for. Japanese consumers are relatively highly taxed, with the top bracket standing at 65 per cent, and many wage earners lower down the scale seeing their incomes eroded by 'bracket-creep', as modest increases in their wages take them into a higher taxation bracket. 'Cutting taxes by Y2,000bn or Y3,000bn (pounds 10bn-pounds 15bn) would given them a much bigger bang for their buck,' Mr Berlow said.

Until recently the government hoped that the Japanese consumer's formidable purchasing power, along with a Y10,700bn supplementary budget announced in August, would stop the country from sliding into an outright recession. But consumers have been tightening their belts as they lose their overtime payments and their year-end bonuses are being cut back. And it is precisely in the area of consumer goods that companies are having the most trouble in reducing their inventories. But so far the Ministry of Finance is strongly opposed to a cut in income tax, fearing a weakening of its power to regulate fiscal policy.

Meanwhile the supplementary budget is still crawling through parliament, five months after it was first proposed, as the political scandal of gangster influence over politicians and illegal payments has paralysed the government. Economists say that the final acceptance of the budget, much of which is devoted to boosting spending on public works, may come too late to have the desired stimulatory effect.

No one in the government, it seems, wants to break to the Japanese public the bad news - which everyone knows anyway - that the economy is facing a recession. But while the nation's leaders are averse to speaking uncomfortable truths, one small section of the financial community has begun to lobby for more freedom to preach the bad news. Analysts at Japanese stockbrokers want to come out of the closet.

Until now, Japanese financial analysts have enjoyed little credibility for the independence of their recommendations, as the proverbial Chinese walls between analysts, brokers and underwriters have barely existed. 'Sell' recommendations are notoriously rare. In a recent survey by the Security Analysts' Association of Japan, 63 per cent of analysts said they 'compromised' with their employers when making a recommendation, and 80 per cent said they felt they had a lower status in society than their European and US colleagues. Now the Conference for Securities Associations wants the independence of analysts to be respected. In the current economic climate, this can only mean a further onslaught of bad news.

(Photograph omitted)

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