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No. 7 — February 19, 1999

 

Feature Article

JAPAN'S ECONOMY IN 1999: RECOVERY, RELAPSE OR CONVALESCENCE? by Douglas Ostrom

Summary

Although Japan's economy has been weak for most of the 1990s, only in 1998 did Tokyo initiate policy changes that could put the economy back on a solid growth path. Whether these strategies will have the desired result will depend on developments in the rest of the world as well as on policy implementation.

Most domestic and foreign analysts, repeatedly burned by gloomy forecasts that proved overoptimistic, now are exceptionally pessimistic about prospects for the world's second-largest economy. At best, they expect it to hit bottom in the middle of this year. Many, however, see no recovery for at least the next 18 months. The consensus is that Japan is headed for a third straight fiscal year of contraction. Recent developments give no reason to doubt that prediction.

Such an outcome would further isolate Japan from the other Group of Seven industrial nations, all of which have outperformed it in recent years, although not for the entire decade. In particular, the fast-expanding external imbalances that are one consequence of a shrinking economy threaten to end the lull in U.S.-Japan trade disputes that has characterized the latter half of the 1990s.

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Weekly Review

BOJ FINE-TUNES MONETARY POLICY by Douglas Ostrom

The Bank of Japan found itself in a tight spot in early February. Although the economy remained weak and short-term interest rates were at record lows, long-term rates were climbing sharply. Last year's revision of the Bank of Japan Law gave the central bank greater independence from the Ministry of Finance. Liberal Democratic Party politicians, determined to fill a perceived vacuum, called increasingly loudly for BOJ to lead long-term rates lower — an action usually hard for central banks, given the tools at their disposal. Although BOJ decisionmakers specifically rejected those calls, they seem to have felt that the situation required a response of some kind. At a regularly scheduled meeting February 12, BOJ's policy board voted to cut slightly one short-term rate in the apparent hope that the reduction would spill over to long-term markets.

 

BANKS QUEUE UP FOR CAPITAL by Jon Choy

Growing pressure from Tokyo and financial markets has spurred Japan's largest banks to ask the government for more money than initially was projected. They will use the public funds to shore up capital bases that have been eroded by write-offs of nonperforming loans. Officials of the Financial Supervisory Agency and the Financial Reconstruction Commission have taken a hard line on recapitalization, insisting that institutions seeking taxpayers' money submit realistic restructuring plans that will boost profits. They also are among the policymakers saying that banks must complete their bad-loan write-offs by the March 31 end of the current fiscal year to qualify for aid. Analysts are anything but certain that Japan's nonperforming-loan crisis will be over in six weeks. These skeptics say that both more money and additional time are needed for a complete resolution of the banking industry's bad-loan problems.

 

JAPAN, SOUTH KOREA REAFFIRM NEED FOR CLOSE CONTACT ON NORTH KOREAN POLICY by Barbara Wanner

Foreign Minister Masahiko Komura told South Korean President Kim Dae Jung February 11 that the Japanese government recognized the importance not only of "military deterrence" but also of "dialogue" in dealing with North Korea. He apparently was concerned that Japan's continued hard-line stance toward the reclusive, Stalinist country might undermine efforts by Tokyo, Washington and Seoul to coordinate policy toward Pyongyang. At the same time, though, Mr. Komura sought to retain some wiggle room. Referring to Tokyo's continued unwillingness to ease the sanctions it imposed after Pyongyang's August 1998 launch of a rocket over Japan, the Foreign minister said that "it is not always necessary for all three countries to have the same policies [toward North Korea]."

 

JAPAN MULLS MORE AID FOR CAMBODIA by Marc Castellano

Cambodia asked Japan February 3 for a ¥4 billion ($33.3 million at ¥120=$1.00) credit to develop its port facilities. The Ministry of Foreign Affairs as well as the Ministry of International Trade and Industry have voiced support for the request. The Ministry of Finance, citing a weak framework for development in Cambodia and questioning the country's ability to repay the loan, remains skeptical. MOFA, MITI, MOF and the Economic Planning Agency will decide whether Tokyo should lend the money. Japan has not made loans to Cambodia for more than 30 years, although it has provided grants.

 

STEEL ISSUE LOSER FOR WASHINGTON AND TOKYO ALIKE by Susan MacKnight

Made-in-Japan carbon hot-rolled steel sheet could be priced out of the huge American market — that is, if supplies of this commodity product have not dried up. The Department of Commerce reported February 12 that it had preliminarily found that Japanese-produced hot-rolled sheet had been sold to the United States at unfair prices. A finding of less-than-fair-value sales was a foregone conclusion in a case notable for its early and overt politicization (see JEI Report No. 45B, December 4, 1998). The only question was how big the tentative dumping margins would be. Prohibitive is the short answer. Virtually duplicating the numbers that 12 integrated steel producers and minimills plus two of their unions had included in their dumping petition, Commerce calculated that Kawasaki Steel Corp. had sold hot-rolled sheet here for 67.59 percent less than it charged at home and that NKK Corp. and Nippon Steel Corp. had underpriced their sales by 30.63 percent and 25.14 percent, respectively.

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