The spectacle might be amusing were the consequences not so dire. With reliable predictability and periodicity over much of the past 10 years, Japanese officials have heralded the emergence of economic data indicating the end to a persistent period of slow growth. In a few weeks or months and sometimes days, the same officials discover new data that forces a reversal accompanied by explanations for the continuing slump that seems never to go away.
Japan's economic indexes all slipped below 50 percent in November for the first time in 23 months. Index readings over 50 percent are considered a sign of economic expansion, while readings under that benchmark signal an impending contraction.
The leading index indicates the condition of economic performance six to nine months hence while the coincident index gauges the current state of the economy, and the lagging index measures economic activity of the recent past.
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In an announcement by the Cabinet Office, the leading economic index was lowered for November to 33.3 percent from its preliminary value of 57.1 percent. This large correction due to the fact that figures for the inventory index and machinery orders had not been available when the preliminary report was prepared. Meanwhile, the coincident index was revised down to 30 percent from a preliminary value of 42.9 percent, and the lagging index was upgraded to 42.9 percent from its preliminary position of 33.3 percent.
From 1990, Japan's GDP per capita has grown by only 0.6 percent. Estimates point to a feeble 1.5 percent growth rate in the current fiscal year up to March 2001. By contrast, the US economy has experienced an average growth rate of almost two percent over the same period of time.
Japan remains mired in a deflationary recession even though wholesale prices rose for the first time in three years during 2000. Since much of the increase can be attributed to rising energy costs combined with a weakening yen, it does not indicate a rebirth of business spending. When the yen hit 118 against the US dollar, it was at an 18-month low.
Indeed, bank lending was lower still. According to the BOJ, credit issued by banks in December fell almost 4 percent, year-on-year. This marks 36 months of continuous decline. After making adjustment for writing off bad-loans, overall lending was actually down almost 2 percent. This means that money supply growth also remains sluggish since credit creation is the primary mechanism for central banks to introduce fresh cash into the system.
With household consumption remaining soft, the elusive recovery has had to depend upon the corporate sector. Yet industrial performance remains weak due to slowing export demand and the deflation of the asset bubble in the high-tech sector.
There has been a decline in the growth of machinery orders that reflect spending on factories, offices and equipment. This important leading indicator accounts for approximately 15 percent of national income as contributed by business investment.
Now with growth in exports and capital spending decelerating and industrial production increasing at about half the pace forecast by economists, hopes for an incipient recovery are once again stillborn.
Unfortunately, as Japan's consumers and businesses are holding back on their purchases, the government continues to conjure up ways to spend for them. It appears that public sector spending formed the basis of much of the recorded new investment during 2000. Yet most of these funds were used ineffectively in that they did not add to sustainable gains in real output. Given that all of this must be repaid through taxes imposed on future activities, these small gains are likely to be offset by losses at a later date.
This is truly troubling since Japan's debt-to-GDP ratio rose from 60 percent in 1990 to nearly 120 percent in 1999 and reaching at least 140 percent during 2000. Presently, it is about twice as large as the same ratio for the US and Germany, and it continues to grow in both absolute and relative size.
Earlier in 1999, producers had growing confidence and were expanding capital expenditures on the back of improved corporate earnings. At that time, there was a rise in the Nikkei stockmarket index and rising household incomes that seemed to herald a revival of consumer spending. Declines in inventories also contributed to an increase in production. But now, a slowdown in the US and the rest of Asia has meant that Japan's producers are finding their inventories rising once again.
At the heart of Japan's problems are its corporatist politics and its industrial structure. These were designed to avoid the adjustments required by the vagaries of market impulses that can lead to corporate and banking failures. Japan is creeping along towards some needed changes. While political reform continues to move at a slow pace, the recent announcement of reduction of the number and the "downsizing" of the surviving bureaucratic agencies is a welcome move.
Meanwhile, tax reform is beginning to take hold. An LDP parliamentary panel on taxation is urging the government to implement tax reforms that would ease corporate tax burdens to encourage restructuring and improve competitiveness. The proposal is to reduce registration taxes levied on companies that divest divisions. At present, companies pay a corporate registration tax of 0.7 percent of the divested firm's capital when they register divested firms. Under the considered proposal, the rate would fall to 0.15 percent. At the same time, the proposal seeks to consolidate corporate taxes by reducing the tax rate on assets transferred to new companies from the present 5 percent to 0.6 percent, the rate paid when firms undergo mergers. It would also allow losses registered by affiliated companies to be subtracted from overall profits of a corporate group to lower the group's tax burden.
But then there is the unwinding of crossholding of shares by banks and corporations that must be completed by the end of March 2001. Then all their holdings will have to be registered according to current market values. This will be painful since most Japanese banks have relatively high levels of cross-held shares, a practice that was common under the operations of Japan Inc. Although this change is welcome, the downside is that it will lead to further weakness in the prices of local shares and more problems in the wobbly banking sector that must now pay a 1 to 3 basis point premium on funds borrowed on the international market. Even so, this is much below the 20 to 80 point premium that was charged to Japanese banks in 1997 and 1998.
The 1990s have become widely regarded as the "lost decade" for Japan's economy. Unfortunately, there is little indication for optimism about recovery during the first 10 years of the new millennium. That would mean a cycle of 20 mostly bad years.
Japan's low levels of consumption expenditures, lagging corporate investment and crippled financial system require further liquidation through bankruptcies and layoffs before there can be any hope for even a gradual recovery. Unless current leaders make bold moves to loosen the grip of the current deflationary recession, Japan may remember this era as one when a full generation lost hope.
Christopher Lingle is Global Strategist for eConoLytics.com.
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