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Mon, Sep 19, 2005 - Page 12 News List

Japan pines for a genuine recovery


There have been plenty of false dawns in the land of the rising sun. This time, with the Japanese economy again showing signs of getting back on its feet, investors hope it will be different.

Previous recoveries, driven by strong public spending and demand for Japanese exports, have failed to stay the course, leaving the world's No. 2 economy stuck in a rut for over a decade since the "bubble economy" burst.

Despite a series of multi-trillion-yen fiscal stimulus packages and near-zero interest rates, the economy remained in stagnation and suffering from deflation for years while public debts ballooned.

This time, however, the recovery appears to be powered largely from within.

"What is different from the post-bubble economic recovery is that the economy is expanding without massive public spending," said Hiroshi Watanabe, an analyst at the Daiwa Institute of Research.

"The current economic recovery is led by growth in the private sector. Corporations have boosted their profitability by carrying out major restructuring focusing on cutting the number of workers," he said.

Consumers are also playing a key role, giving a vital boost to companies which have been struggling in the face of weak demand in their home market for years.

"Along with steady growth in exports, Japan's domestic demand has been recovering on the back of rising consumer spending and capital investment," said Akihiko Suzuki, a senior economist at the UFJ Institute.

Revised figures showing that the world's second-largest economy grew by a revised 0.8 percent in the second quarter and by 3.3 percent on an annualized basis lifted talk of a turnaround last week.

Not all analysts are upbeat, however, warning of the risk of a slowdown in consumer spending.

"We think that the outlook may not be quite as good as some of the recent press comment suggests," John Sheppard, chief economist at Dresdner Kleinwort Wasserstein, told investors in Tokyo.

"We see deflation continuing in Japan for some time," he added.

Investors seem more optimistic. The growth figures, which came hot on the heels of an election victory by market-friendly Prime Minister Junichiro Koizumi, triggered a new stampede into Japanese stocks.

The Nikkei-225 is close to touching the symbolic 13,000-point level for the first time for four years -- still a far cry from the heady days of the late 1980s when the index peaked at almost 39,000 before spiraling lower.

Koizumi has already cut public works spending in his four years in office and hopes to revitalize the economy further by privatizing the post office with its US$3 trillion in assets.

The postal plan is central to his drive to slim Japan's bloated government in the face of a rapidly graying population.

Japan's public spending peaked in the fiscal year 1998 at ¥14.9 trillion (US$135 billion), but by last year had dropped to ¥8.9 trillion.

The debt-burdened private sector has also been through some painful changes.

"Corporations have gone through major restructuring and their financial base as well as profitability have greatly improved," Suzuki said.

Bank of Japan officials meanwhile seem hopeful that an end to deflation may be in sight and have hinted at a possible tightening of their super-stimulative monetary policy early next year, though actual interest-rate rises still seem some way off.

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