International Business : Optimism Rising in Japan, Again, Amid Mixed Economic Signs : Growth: Despite the yen’s show of muscle this week, most analysts think the nation’s expansion will continue. Consumer spending has surged.
Consumers have loosened their purse strings. Business sentiment is improving, and the economy’s overall output has surged in recent months.
Once again, the Japanese have hopeful signs that their gloomy economy is brightening after three years of recession.
“Just about this time last year, I believe I said things are moving for the better,” Shoichiro Toyoda, chairman of Toyota Motor Corp., said recently. “And I believe I had said the same thing two years ago. But every time, some unexpected event pushed the Japanese economy back into the doldrums.”
A budding recovery last year choked when the Japanese currency gained strength. In recent days, the yen has again unexpectedly put on muscle, dampening optimism that the recession has indeed bottomed out.
The best sign of a recovery came Tuesday when the government released statistics showing that the economy grew at an inflation-adjusted annual pace of 3.9% in the first three months of this year. Consumer spending surged at an annual rate of 5.8%.
But also on Tuesday, the U.S. dollar in New York trading dipped below the psychologically key level of 100 yen, a post-World War II low. Massive intervention by the Bank of Japan kept the close Wednesday in Tokyo at 100.65 yen to the dollar.
Japanese corporations have made strenuous efforts to cut costs over the past few years. But very few firms can make money from exports when exchange rates are 100 yen to the dollar.
“The abnormally strong yen will not only damage the Japanese economy, which has been gradually recovering, but (will) bring about the collapse of manufacturers in the country,” lamented Takeshi Nagano, president of the Japan Federation of Employers Assns., a business group. Such extreme yen strength will cause unemployment by forcing manufacturers to move their factories overseas, he warned.
Prime Minister Tsutomu Hata called an emergency meeting Wednesday of his top economics officials. They later emerged pledging to keep in close touch with other key industrialized nations to hold the yen’s spurt in check.
“The yen’s appreciation is speculative,” Hata said, predicting that the speculative mood will not last long.
Despite the strong yen, most observers believe Japan is at least poised to break out of recession later this year, with typical forecasts being for about 1% growth during the current fiscal year, compared to zero growth for the year that ended March 31.
Some observers believe the economy is stronger than last year and will mitigate the impact of the strong yen. The brightest signs of a budding recovery are coming from increased personal consumption and public works spending--two areas that are largely insulated from yen-dollar rates.
The stimulative effects of government public works projects were limited last year by a series of construction industry scandals, including arrests of local politicians for alleged bribe taking. This had a chilling effect on the process of awarding contracts, but projects that had been delayed are now beginning.
Sales of household durable goods such as refrigerators and washing machines have done especially well this year. Boosted by falling land prices and low interest rates, housing construction has been a bright spot for more than a year. This indicates that consumer spending will continue to rise as people move into those houses and install new appliances.
Support for consumer spending should also come from this year’s $54-billion income tax cut, which employees will begin to feel in their summer bonuses, due later this month.
“Public works spending has been increasing quite nicely. Personal consumption, it’s fair to say, has been stronger than expected,” said Jeffrey Young, an economist at Salomon Bros. Asia Ltd. “Looking forward, the income tax cut is being implemented right now. That should be very important in ensuring that the economy continues to grow.”
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Evidence of a turnaround was also seen in April’s industrial production figures. Government officials and economists had been predicting about a 2.5% drop, but the numbers came in at a less severe 1.9%.
This indicates that inventories are being drawn down and that future boosts in consumer spending will be reflected in greater factory production. The Ministry of International Trade and Industry predicts industrial output will rise 0.3% in the second quarter over the first quarter of this year.
“I think a sustainable recovery is unfolding,” said Geoffrey Barker, an economist at Baring Securities Ltd. “It’s very much driven by domestic demand--personal consumption, public investment.”
Most of Japan’s major exporters, he added, still sell most of their products at home.
“They can make money if the domestic economy recovers,” he said, “even if the yen stays at 100 to the dollar.”
Another sign that the recovery is sustainable is growth in overseas markets. The U.S. economy is expanding, pulling in Japanese goods even at high prices.
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Most of East Asia, another key export market for Japan, is booming. The exchange rate between the yen and European currencies is fairly stable. Thus, while Japan may not be able to seek an export-led recovery, neither does it face disaster in this area.
No one expects Japan to return quickly to the rapid-growth days of earlier decades. It still faces too many problems, including reduced export competitiveness, downward pressure on wages and employment, and the continuing problem of bad debts held by the banking industry, which saw many loans go bad as real estate prices collapsed during the recession. But talk of large-scale layoffs has receded, compared to last fall.
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Also, the government can take further stimulative steps if necessary, such as a further expansion of public works spending or additional cuts in interest rates. This flexibility may be the best guarantee that at least slightly better times lie ahead.
“We are at that sweet spot in the cycle,” Barker said, “where if it’s good news, it’s good news. And if it’s bad news, you get a policy response.”
