Tue, Apr 06, 2004 page9

• Has Japan's economy turned the corner?

  • By William Keegan / THE OBSERVER
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  You can lead a horse to water, but you cannot force it to drink. Governments can do everything to encourage "consumers" -- which is what economists call people -- to spend; but if they don't feel like it, they don't.

  This has been the Japanese government's problem for some years now, but as the clouds begin to lift over the world's second biggest economy, the hope is that the people -- I mean the consumers -- will finally take their savings from under the bed and go out and spend.

  We have to see this in perspective of course. For all the alarm among economic observers, and in the media, these past few years, the Japanese have not really stopped spending. But they haven't gone on increasing spending at a steady rate in line with what a successful modern capitalist economy requires. And when consumer spending stagnates, or even falls (as it has done occasionally in Japan) the gloom deepens.

  For, despite the fact that Japan is famous for its exporting sector -- which is where the latest Japanese economic recovery began (there have been several false dawns in the past 10 years) -- consumer spending accounts for by far the largest proportion of demand in Japan, as in other economies.

  But exports and business investment, though smaller in total, have always exercised a vital and leading role in the promotion of Japanese economic growth and general confidence in the economy.

  This was true of the long post World War II recovery period and of the remarkable way in which Japan (a large importer of energy) bounced back from the oil crises of the 1970s and began to be talked about as a more formidable and dynamic economy than the US itself.

  "How," Western bankers used to ask me, "does Japan do it?"

  Well, these things go in cycles, and for a long time people thought Japan had forgotten how to do it. The bubble economy of the late 1980s and early 1990s produced such a disastrous "bust" that it has taken all this time for the Japanese to regain their confidence.

  Osamu Watanabe, chairman and chief executive officer of the Japanese External Trade Organization (Jetro) acknowledged in a lecture at Churchill College, Cambridge, England, earlier this year that, after turning the corner in 1995 and 1996, Japan "tightened her fiscal policy too quickly and, suffering from non-performing [bank] loan problems, entered a financial recession in the fall of 1997. A recovery in 1999 and 2000 came to a halt in 2001, as the banks' problems with `non performing loans' [bad debts to the likes of you and me] increased. As Watanabe said, `deflation had been smothering the Japanese economy since 1998.'"

  Now, since most of us grew up in a world where the big problem was considered to be inflation, it might sound like good news if prices stop rising, But when they stagnate and begin to fall, the impact on "consumers" is negative. They begin to delay purchases of goods, in the hope that they will become even cheaper. Add to this the concerns in Japan about its ageing society and worries about how people will cope in old age and the emphasis shifts from spending to saving. As one economist joked to me on my last visit to Japan two years ago, "the only item that's really shifting is household safes, for people to store the savings they are not spending."

  However, although they themselves went through a collective depression, the Japanese seem to have come through the worst and regained their confidence. China, so far, from being a serious rival has emerged as an important export market. And by intervening dramatically in the foreign exchange market to keep the yen reasonably competitive, the Japanese seem to have re-embarked on a period of export-led growth, which in turn encourages business investment and may well lift the spirits of consumers. But, in the end, although economists call their trade a "social science," there are no cast-iron guarantees in this business.
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