Scepticism on Japan’s 3.7% growth; restraining forces seem stronger

Scepticism on Japan’s 3.7% growth; restraining forces seem stronger
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First Published: Wed, Aug 19 2009. 10 26 PM IST

Updated: Wed, Aug 19 2009. 10 26 PM IST
Champagne corks are probably popping at Liberal Democratic Party headquarters in Tokyo. The reason for the celebration: Japan’s economy grew 3.7% last quarter.
It’s the equivalent of answered prayers for Prime Minister Taro Aso, who is expected to lose an 30 August election. Aso will no doubt argue his Liberal Democratic Party deserves more time in power to continue its recovery efforts.
Aso and his cronies should keep the bubbly on ice. Investors, too. The growth surge reeks of aberration and those who get all excited about it may live to regret it.
Yes, Japan, like France and Germany, is benefiting from the $2.2 trillion (Rs10.7 trillion) of stimulus spending by governments worldwide. Aso’s administration alone spent $264 billion.
Exports, consumer spending and a big increase in government investment returned the second biggest economy to growth.
There are two bigger considerations to keep in mind, though. One, the forces restraining Japan’s growth are stronger than those supporting it. Two, the complacency that longtime Japan investors know all too well may be returning.
Richard Jerram, chief economist of Macquarie Securities Ltd in Tokyo, has a point when he says you don’t want to be a spoilsport about Japan’s impressive gross domestic product figure. At the same time, he says, you can’t really ignore that prices are falling.
Fighting the dowturn: A shopping mall in Tokyo, Japan. The country is hardly destitute, yet the crisis has set back the nation in under-appreciated ways. It has widened the gap between rich and poor. Robert Gilhooly / Bloomberg
The deflation that took hold in the late 1990s had a devastating effect on household and business sentiment. And it never really ended. It took record price increases for food and energy over the past two years to produce a little inflation. Once they reversed, prices fell anew. Consumer prices plunged a record 1.7% in June. This week’s GDP report showed wages fell a record 4.7% from a year earlier.
Good luck getting savings-rich consumers to spend more in this environment. It’s quite simple, say economists such as Seiji Shiraishi of HSBC Securities Japan Ltd: Domestic demand is about 70% of the economy and it’s very, very weak.
Once government spending runs its course, weak income trends will take over.
If the opposition Democratic Party of Japan wins this month’s election, as pollsters predict, its options are severely limited. Public debt is almost double the size of the economy, and interest rates are near zero. It will need to think fast about cost-effective ways to restore economic confidence.
It’s easy to lose perspective on where Japan is right now. While not quite as impressive as China’s 7.9% growth, the figures are nothing to sniff at. Still, even after the second quarter snapback, Japanese GDP is only at 2004 levels. A sobering thought, isn’t it?
Japan is hardly destitute. Yet the global crisis has set back the nation in under-appreciated ways. It has widened the gap between rich and poor. It has also led to huge companies such as NEC Corp., Panasonic Corp. and Sony Corp. announcing US-like mass layoffs, which Japan always proudly avoided.
Lifetime employment is being phased out for entire generations. While that may sound good to overseas investors looking for change at Japanese companies, the transition to part-time work contracts is spooking the nation of 126 million.
It is also hurting the female workforce disproportionately.
And then there are the most extreme side effects. Homelessness is on the rise in cities such as Tokyo and Osaka, albeit from a low base. The suicide rate increased 4.2% in the first half of this year during hard economic times. And hovering above all of this is a fast ageing population that threatens to overwhelm government coffers a decade from now.
Amid mounting gloom, the government’s focus is on raising the consumption tax. Such an argument is as ill-timed as it is damaging to already deteriorating household and business sentiment.
It’s amazing that there isn’t more serious focus on lowering taxes to stimulate demand.
The theories of John Maynard Keynes are alive and well in Japan. Officials in Tokyo are tossing money at the economy. The spotlight must also be on cutting taxes for small to midsized companies to encourage job growth.
It’s not supply-side economics that Japan needs, but a sharper focus on empowering entrepreneurs to do their thing.
The time seems ripe, given that the loyalty Japanese once had to household-name companies is breaking down.
Many 20-somethings now feel comfortable eschewing offers from supposedly safe employers such as Toyota Motor Corp. in favour of start ups.
The bad news is complacency. Japanese politicians have a track record of declaring victory and stepping back to do other things when growth returns.
The collective sigh of relief coursing down the streets of Tokyo is a dangerous thing.
Can we say with 100% certainty that Japan’s economy will deteriorate? No, and growth of 3.7% does count for something. Just be 96.3% sure, Japan isn’t out of the economic woods yet.
The more the government believes it is, the more we should worry.
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First Published: Wed, Aug 19 2009. 10 26 PM IST