Japan’s Economy Showing Signs of Health

The Japanese economy shows signs of an edging back to health, according to figures released Tuesday, but economists warned that a planned rise in the national sales tax could cause problems.

The index of leading economic indicators--a closely watched figure that predicts economic performance in the coming six months--rose above the “boom or bust” mark of 50 in April after having dipped below that level for the first time in six months in March.

The index, compiled from a basket of indicators, stood at 55.6 on a scale of 100 for April, up from 36.4 for March, the government’s Economic Planning Agency said.

“It’s a good sign [of continued economic growth]. We’re looking at a full-blown economic recovery,” said Richard Werner, chief economist at Jardine Fleming Securities Tokyo.

However, the index of coincident indicators, which measures current economic conditions, fell below 50 for a second straight month. In announcing the results, a planning agency official told reporters there is “no shadow over Japan’s economic recovery.”

Although optimism about the economy is starting to prevail, there are developments on the horizon that could put a drag on a recovery.

“I expect a short phase of economic slowdown of about six to nine months starting from this summer,” said Akiyoshi Takumori, a chief economist at Sakura Securities Co.

Economists pointed out that plans to raise Japan’s consumption tax to 5% from 3% starting next April could put a damper on consumer spending and housing investment.

Japanese ministers on Tuesday formally endorsed the raise, which the government says is needed to offset losses from previous tax cuts designed to give the economy a boost. Economic Planning Agency Minister Shusei Tanaka told reporters that the tax increase would not knock the economy off the recovery track.

Japan’s authorities may decide to keep in place special income tax cuts for the fiscal year starting in April 1997 to minimize any adverse effects from the sales tax increase, analysts said.

Mitsubishi Research Institute said the sales tax increase would push down real economic growth by 1.1 percentage points next fiscal year.

The economy will also lose the support it had from public works spending in past government stimulus measures. In addition, the unemployment rate might rise as Japanese firms move their operations overseas to reduce costs, economists said.