Mixed Signals on Prospects for Japan’s Economy

Despite growing evidence that Japan is technically slipping back into recession, economists say the economy remains on track for a very slow, bumpy turnaround.

“The problem is that the world’s most unreliable statistics, Japanese [gross domestic product] figures, have become the focus of attention,” said Jesper Koll, chief economist with Merrill Lynch Japan. “We’re still looking at a corporate-led recovery.”

Recent government reports have raised concerns that Japan’s economy is heading into another tailspin. Japan’s Economic Planning Agency pegged GDP growth in the world’s second-largest economy at a negative 1% for the July-September period. And this week it signaled that growth for October-December would be negative as well.

Two consecutive quarters of shrinkage in the GDP--the economy’s total output of goods and services--meets the definition of a recession.

Yet for a couple of reasons, even optimistic economists expected a weak October-December quarter.

The year-end bonuses that form an important part of the average Japanese pay package were down 9.4% on average, undercutting consumer spending. “My bonus was cut 15%,” said Megumi Kato, a 23-year insurance industry worker from Tokyo. “As people’s salaries go down, insurance is one of the first things they cut.”

The fourth quarter also saw a drop-off in government-funded construction projects and other fiscal spending designed to prop up the economy. The regular 1999 government budget was spent early in the year to accelerate its impact, and a supplementary budget passed in November had not yet kicked in.

“We saw public construction starts fall pretty dramatically,” said Brian Rose, economist with Warburg Dillon Read.

Make no mistake, say readers of the economic tea leaves. Japan still has huge problems and remains heavily dependent on deficit spending for life support. Household spending has fallen for seven straight years, and the private sector remains on very weak legs.

Still, economists say, there are signs of life that undercut the impression left by the GDP figures. Industrial production and machinery orders are picking up, corporate sentiment is starting to improve, and the government’s supplementary stimulus package is starting to kick in.

“Department store sales in January went up, people are starting to take more trips, and car sales are growing,” said Susumu Takahashi, chief economist with the Japan Research Institute.

Perhaps most heartening for stock investors and others looking out several quarters are growing signs that corporate restructuring is moving ahead, a key factor in the recent rise in Japan’s stock market, analysts say.

Despite worries about the economy, Tokyo’s Nikkei-225 stock index has surged 4.9% in yen terms so far this year and closed Monday at 19,945, the highest since mid-1997. The index fell modestly Tuesday.

New financing schemes are slowly breathing life into start-up companies. A few innovative industries such as telecommunications and technology are growing quickly, challenging the old guard and at least showing what is possible. And tens of thousands of jobs are being cut through attrition at companies such as NEC and Sony in a process that has caused great angst but promises long-term dividends.

Westerners call on the Japanese government to more aggressively cut taxes, deregulate and alter the power and decision-making structures, but these are difficult issues politically and areas in which Japan is moving at its own pace. But in the private economy, change is far more rapid. Susumu Katayama, a 50-year-old administrator for a manufacturing company in Tokyo, laments how fierce competition has become these days as prices in his industry drop and only the most efficient companies survive.

“Restructuring is a powerful force that will continue because the impetus is the markets, not government policy,” said Robert Feldman, chief economist at Morgan Stanley Japan.

In the end, many economists say Japan’s best hope lies with the thousands of companies emerging stronger and smarter from near-death experiences, not with the bureaucrats who have spent $1 trillion in the 1990s propping up the economy.

“Japan is making the transition from the old economy to the new,” said Kathy Matsui, chief strategist with Goldman Sachs Japan. “What we all want to see is sustained, balanced growth, rather than one-off artificial stimulus driven by the government.”

Researcher Hisako Ueno in The Times’ Tokyo bureau contributed to this report.

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Shrinking Again?

Japan’s economy may have contracted again in the fourth quarter. Percentage change in real gross domestic product each year through 1997, and quarterly since then:

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Third quarter, 1999: --1.0%

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Sources: Organization for Economic Cooperation and Development,

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