Market Newsletter : 2% Growth? In Tokyo, It’s Called a Recession : Japan’s economy hasn’t quite jumped the track. But there are definite signs that the engine is losing power.
Cruising speed for the Japanese economy means growth of about 3.5% to 4% a year. That is the growth rate Prime Minister Kiichi Miyazawa promised George Bush he would maintain when the President visited Tokyo earlier this year. But instead of being the locomotive to pull the world out of recession that Miyazawa promised, Japan’s growth is falling far short of those targets. While the 2% to 3% growth rates economists now project are respectable by most developed country standards, that’s called a recession in Japan.
Japanese companies are retrenching.
This follows a five-year spending spree from 1986 to 1991 during which Japan invested $3 trillion in new plant and capital equipment and a further $600 billion on research and development. According to a recent survey by the Nihon Keizai Shimbun, Japan’s business daily, Japanese companies will actually cut their capital spending by 4.9% in 1992, while research spending will be held flat for the first time in five years. Economists fear the decline in investment spending will further slow growth in an economy already facing slumping consumer demand.
The economic slump has exacerbated Japan’s already massive trade surplus.
A weak domestic economy is no longer taking in the foreign autos, helicopters and furs it once did. Meanwhile, Japanese companies with excess inventories are promoting exports to still-healthy overseas markets such as the Middle East and Asia.
In February, Japan’s trade surplus reached an all-time high of $10.23 billion; economists predict the March figure will be even higher. Kenneth Courtis, senior economist at Deutsche Bank Capital Markets in Tokyo, predicts Japan will end the year with a phenomenal $123-billion trade surplus, up from $103 billion last year. More than a third of that surplus is likely to be with America. A worsening balance of trade makes it difficult for Japan to export its way out of its slump as it has in the past by forcing it to hold back sales to its biggest markets in Europe and America, says Iwao Nakatani, an economics professor at Hitotsubashi University.
Japanese business failures are rising sharply as companies are forced to adjust to lowered demand.
Many must pay off loans using as collateral stocks and land that are now sharply lower in value. According to Teikoku Data Bank, 1,056 companies became insolvent in February, up a sharp 56% from last year. The total debts left behind by these companies came to $3.4 billion, up 39% from the year before.
Foreign workers, who have poured into Japan over the last few years to feed the country’s hungry labor market, are now finding it more difficult to get jobs. Large companies won’t fire workers, but their smaller subcontractors are being forced to cut their work forces to adjust to the new conditions. Chugai Kogyo, a welding company that had employed 100 workers, mostly from Sri Lanka and Peru, has cut its foreign work force by 10%. A sharp drop in new construction, a big employer of foreign workers, is also contributing to the drop in jobs for overseas workers. Many observers fear that an increase in unemployed foreign workers could lead to a rise in social problems.
Corporate earnings have suffered as a result of the economic downturn.
Even Toyota Motor Corp., one of the most admired of Japanese companies, expects to suffer a 30% drop in operating profits in the fiscal year ending June 30. Although Toyota has not cut its $4.4-billion capital investment plan--which includes two new factories--most other auto companies have announced cutbacks in investment plans. Consumer electronics, semiconductor and steel makers are suffering from earnings declines and have scaled back investment plans.
But Japan has far more policy options available to pull itself out of the slump than does the United States.
Japanese government, industry and personal debt is still relatively low. With unemployment hovering around 2%, Japanese families are still making money and adding to their savings. Personal investment by Japanese households, for example, climbed 22.5%, an increase of $204 billion, in the last three months of 1991 from the previous year, according to the Bank of Japan. By the end of last year, Japanese individuals had $1.2 trillion in savings deposited at financial institutions, about $10,000 for every man, woman and child. Insurance companies are also flush with cash.
Much of Japan’s surplus cash is going into post office savings accounts.
The Japan Development Bank, a government agency with access to the funds, is planning to offer low-interest loans to small businesses to help them invest in labor-saving devices that will help them cope with the continuing labor shortage. The equipment purchases, in turn, will help spur demand. The government has also used its powerful but informal “administrative guidance” to ask Japan’s private utilities and telecommunications companies to boost their investments this year. The Ministry of Finance has also indicated that it will spend 75% of its $100-billion public works budget in the first six months of the fiscal year that begins April 1. These investments should act to keep the economy growing at a slow but steady rate.
Mixed Signals for Japan
Although Japan’s economy is slowing, households are actually investing more money. Some recent figures:
Projected corporate spending: - 4.9%
Projected trade surplus: +$20 billion
Business failures: + 56%
Household investment: +22.5%
SOURCES: Nihon Keizai Shimbun; private economist; Teikoku Data Bank; Bank of Japan
