Mon, Dec 29, 2003 page10

• Japanese unable to shake off the deflation monkey

  • AFP
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  Japan's economy is forecast to maintain steady growth of 2 percent, but individual Japanese are not likely be able to shake the deflation monkey off their backs next year as they anticipate more salary cuts and layoffs.

  The Year of the Goat is ending on an upbeat note as the Japanese stock market has rebounded and top companies are posting record profits despite the pressure of a strong yen against the dollar.

  Prime Minister Junichiro Koizumi is expected to usher in the Year of the Monkey by putting greater pressure on banks to slash non-performing loans by abandoning troubled businesses. But critics say his "no pain, no growth" policy is delaying Japan's exit from asset deflation.

  Meanwhile Japanese salaried workers appear to be resigned to accepting higher taxes on low incomes and rising social security bills after returning Koizumi's ruling coalition to power in general elections last month, hoping they will soon reap the benefits of tough reforms.

  In public remarks, Koizumi appears less concerned about the 3.4 million unemployed -- just above 5 percent of the workforce -- and more keen on pursuing his pet projects of privatization of the powerful post office and the money-losing highway corporation, which he believes will eventually help revitalize the economy.

  His plan is to transform Japan into a dynamic American-style competitive society.

  But critics say his approach will shrink the country's large middle-class, once the engine of stable growth, and divide society into two distinctive classes: a majority of low-income earners and a handful of super rich.

  Takuro Morinaga, economist and author of the best-seller Economics for Surviving the Era of the ?3 Million Annual Salary, recommends Japanese adopt a slower-paced continental European lifestyle with modest salaries and more holidays, reminding them that merit-based salaries in cut-throat corporate cultures are not for everybody.

  The average Japanese household income is estimated at ?6 million to ?7 million (US$56,000 to US$65,000).

  Morinaga questions the recently popular Japanese tendency of labeling every company and person either a "winner" or "loser."

  "When the American-style class system hits, it will shake up Japan's `stability' and send 90 percent of salaried workers into the `loser' group," he writes in his book. "You will truly become a loser if you consider yourself a dropout."

  Morinaga and other economists have warned Koizumi's policy of drastically reducing non-performing loans at major banks will wreck the domestic economy in the absence of a government shock absorber against stubborn deflation.

  Deflation, or constantly falling prices, lowers the nominal cost of living but also squeezes corporate profits, prompting salary cuts and the closure of offices and factories. Interim earnings reports for the fiscal year to March next year have shown that some companies returned to or boosted profitability after years of restructuring.

  Ryutaro Kono, chief economist at BNP Paribas, foresees an above-consensus forecast of 2.8 percent growth in real terms for the year to March 2005, but at the same time he warns "it is difficult to move out of deflation in the current cycle of economic expansion."

  Exporters are leading the current recovery phase thanks to booming shipments to the US and Chinese markets, but manufacturers are likely to scale back capital spending quickly if exports slump, Kono said.

  Meanwhile, non-manufacturers, like retailers and builders that rely on domestic demand, cannot easily boost investment in equipment as deflation or zero inflation will continue weighing on their profitability, he added.

  The Bank of Japan's quarterly Tankan survey showed in October that a majority of manufacturers felt confident about business conditions for the first time in nearly three years.

  Business sentiment further improved this month for large manufacturers, but the survey also pointed to struggling smaller firms.

  Most economists expect expansion to continue through Fiscal Year 2004, but forecast a US slowdown and eventual declines in exports caused by the rising yen, and the fading effect of corporate restructuring can chill business and consumer sentiment again.

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