Despite Drastic Efforts, Japan’s Output Falling

After a drastic and costly rescue effort, there were high hopes that Friday’s government report would detect a stronger pulse in Japan’s comatose economy.

Instead, the quarterly report showed that the nation’s economic output shrank by a worse-than-expected 0.8% in the last 15 months, renewing the gloom that has pervaded the world’s second-largest economy for five consecutive quarters.

“This was really a shock,” said Kuzutaka Kirishima, analyst with Sumitomo Life Research Institute.

Economists expressed particular concern that the only sign of life in the October through December quarter came from government spending, as Tokyo continued to pour a flood of money into dubious construction projects.

Economists say Japan can’t maintain this hot spending pace--it has thrown $830 billion into bridges, roads and other government programs in the past 12 months alone--raising fears that the economy will fall further once the stimulus tap is turned down.

Nor was there any sign that all this public money is having much spillover effect on the “real world” of private companies and consumers.

“Japan’s economy is barely surviving, supported only by public works,” said Yasunari Ueno, chief economist with Fuji Securities Co. Ltd. “Therefore a real recovery, meaning an increase in domestic spending, can’t be expected for a long time.”

Virtually all other sectors of Japan’s economy, including household spending, corporate investment and even foreign trade, deteriorated in the quarter. On an annualized basis, the economy posted a daunting minus-2.3% growth rate.

“It’s the deflation nation,” said Andrew Shipley, economist with Schroders Japan Ltd. “Japan is in a negative spiral where layoffs and salary cuts lead consumers to spend less and companies to invest less, leading in turn to more layoffs, and on it goes.”

Several analysts added that the government’s credibility is being undermined by its constant pronouncements that the worst is over and a recovery is just around the corner--only to have things deteriorate further.

In particular, analysts criticized Economic Planning Agency Director Taichi Sakaiya, who came to office on a pledge to issue more realistic government projections.

As late as Jan. 26, Sakaiya said he expected positive economic growth for the October-December period.

“This is egg on the face for him,” said Chris Calderwood, chief economist with Jardine Fleming Securities (Asia) Ltd.

Others questioned whether the government lacks the tools it needs to do its job.

“Do they have enough data?” asked Hiroshi Sakurai, analyst with Kankaku Securities Co. Ltd. “It really makes me wonder.”

The Japanese government’s claim that the economy will grow by 0.5% in the fiscal year ending March 31, 2000, has also been greeted with its share of skepticism.

Even exports, Japan’s only real bright spot in recent months and its traditional source of strength, declined by 3.4% in the latest quarter.

Analysts said the decline in trade performance will likely intensify in 1999 as the impact of the yen’s recent appreciation is felt. A higher valued currency makes Japan’s exports less attractive overseas.

“This is the start of a trend, really,” said Matthew Poggi, economist with Lehman Bros. Japan. “And you can’t even blame it on the higher currency yet. That won’t kick in until the middle of this year.”

Japan’s long-standing hope is that its giant government-spending programs will put a floor under the economic slide and prompt consumers to spend more and save less. Renewed confidence is key because household spending accounts for 60% of Japan’s economy.

Despite some aggressive discounting by supermarkets in November, however, consumer spending still fell by 0.1%.

“Domestic demand was extremely weak,” said Hiroshi Kuribayashi, analyst with Barclays Capital. “In my mind, there’s no way the Japanese economy is on a recovery path.”

Nor can the Japanese consumer be blamed, given the daily barrage of bad economic news and the growing individual fears of pay cuts and job losses here.

“I’m really worried about my future,” said Ikuo Tawara, a 60-year-old telecommunications industry worker dressed in a grubby blue trench coat held closed against the Tokyo wind. “I’m trying to spend as little as possible. I guess I won’t have the life I dreamed of after retirement, like going on trips and playing golf.”

Corporate investments in the October-December period fell by a steep 5.7%, indicating that Japan is plagued by overcapacity of as much as 30% in some industries, such as construction.

Most companies these days are cutting back, not investing. Two dramatic examples: Sony Corp. is eliminating 17,000 jobs, and NEC Corp. is cutting 15,000.

Spending on housing, another important sector, fell in the quarter by 7%. Although tax incentives and recent declines in interest rates--they are now almost zero in some short-term markets--raise hopes that housing starts will pick up, there was no evidence of this last quarter.

“I’m not sure I can hold onto my job,” said Rie Shimizu, a 30-year-old clerical worker at a Tokyo consulting company. “My biggest worry, though, is my husband’s job. We were planning to buy a house, but it’s kind of scary buying a house at this point.”

While the Bank of Japan’s recent easing of monetary policy has been warmly greeted by many economists, this will not help much until banks start lending and companies begin investing--and that depends on renewed confidence.

The very fact that this quarter’s numbers were so bad means that the next quarter could see zero growth or even a slight upturn, said Tetsuro Sugiura, chief economist with Fuji Research Institute.

Michael J. Naldrett, economist with Dresdner Kleinwort Benson Tokyo, also believes that there is a basement in sight.He pointed out that the prior quarter’s numbers were revised upward, making the October-December period look worse. Furthermore, companies have reduced their inventories, housing starts will likely improve and capital expenditures should at least stop falling so rapidly in the near future, he said.

“I think we’re hitting bottom,” he said. “Maybe I’m a maverick.”

Etsuko Kawase in The Times’ Tokyo Bureau contributed to this report.