NEWS ANALYSIS : Japanese Losing Confidence in Their Economy : Impact: While the country’s economic health is fine in some respects, fears have prompted corporations and consumers to make cutbacks.
Economic superpower Japan is suffering a crisis of confidence.
Despite an economy that appears healthy by Western standards and aggressive government actions to promote growth, business leaders and consumers remain mired in pessimism.
The latest sign of malaise came Monday when the stock market tumbled to a six-year low despite the Bank of Japan’s decision to cut the discount rate on loans to banks half a percentage point to 3.25%--a month before the cut was expected.
Throughout Japan, corporations are sharply curtailing recruiting among new college graduates and families are cutting back on such discretionary spending as eating out, buying new cars and taking expensive vacations.
The economy is growing at a respectable rate of about 2.4% a year and unemployment is just over 2%--an achievement that is the envy of the United States and most European nations.
But there are cracks in the armor that have sparked fear in the hearts of many Japanese. Bankruptcies are soaring, industry is coping with low demand for products, banks are reporting larger numbers of bad loans and real estate companies are bleeding from falling property values.
The United States has a lot riding on Japan’s economic health. Hard-fought trade battles have helped open up some markets in Japan. With Europe in a slump, American companies need to sell U.S. goods to Japan and other Asian nations at a faster clip. Also, many sectors of the U.S. economy would benefit from Japanese investments now stalled by losses in the domestic real estate and stock markets.
Prime Minister Kiichi Miyazawa on Sunday won a mandate of sorts to fix the economy when he led the ruling Liberal Democratic Party to victory in the upper house elections. Miyazawa also has a reputation for being astute about the economy, with a strong belief in the government’s power to move markets. Now many analysts are looking to see if he will show those skills to restore confidence by taking concrete steps to increase government spending and cut taxes.
Briefly last week, Japanese investors thought the old magic might be back when it appeared the government was intervening to shore up the stock market.
When Miyazawa announced that his top Cabinet ministers would meet Friday night to address the problems of the weak stock market, it seemed that he was finally taking charge. “We must think in terms of the global position of the economy,” Miyazawa said, grandly suggesting he was planning a dramatic move to prop up the sluggish economy.
In a burst of optimism, stock prices shot forward more than 3%.
By Friday, however, it was clear that Miyazawa’s plans were no more than a rehash of the government’s earlier promise to increase spending. In a program expected to be worth about $48 billion, the prime minister said funds would be made available for low-interest business loans, public works projects and other programs to stimulate the economy. But the government provided no details as to how much would actually be spent and when. Also absent from the program was a widely anticipated tax cut.
Stock prices fell back, with the Nikkei plunging 124.45 points Monday to close at 15,373.34. In early trading today, the market fell another 150 points.
“Miyazawa took a first step toward bringing back confidence in the economy,” said Jesper Koll, economist at S.G. Warburg’s Tokyo securities office. Koll argued that by speeding up the Bank of Japan’s decision to cut its discount rate, Miyazawa created at least the appearance of a coordinated government policy, something critics say has been sadly lacking in recent months.
But while the stimulative package Miyazawa has outlined could go far to reignite the domestic economy when it is implemented, the Miyazawa government’s inability to more clearly articulate the plan may be blunting the program’s impact, Koll said.
The government’s delay in announcing an economic package is understandable given the apparent health of the economy. And there is also the bright side of the slowdown: Competition is so fierce, prices of everything from condominiums to washing machines are falling for the first time in years. Lower prices have long been a goal of the government.
But if the economy appears healthy in some respects, it is also far less predictable than most investors would like. Insurance companies, which have the largest amounts of capital to invest, are hesitant to place their bets on the stock market when unexpected news keeps bubbling up about troubled banks and real estate companies. Insurance companies have already seen their stock holdings decline in value by more than $300 billion and can’t afford to take any more losses.
Too many key components of the nation’s economy no longer appear to be rock solid, scaring investors into believing that hidden land mines will go off and destroy any new investments they make.
Six months ago, bank executives stated confidently that the level of bad bank loans in Japan was at most $100 billion. Now analysts talk of non-performing loans in the neighborhood of $160 billion to $240 billion.
Each month the bankruptcy numbers seem to worsen. In the first six months of this year, bankruptcies were up 39% from the year before. Since Japanese banks tend to prop up their troubled borrowers rather than let them sink, it could be years before these problems are worked out.
Housing construction has rebounded since the beginning of this year, the only silver lining in the cloud, but some predict new building could dip again.
