No. 1 — January 7, 2000


Weekly Review

--- by Douglas Ostrom

Every December, Tokyo issues an economic outlook for the coming fiscal year. Inevitably, the consensus of private-sector forecasters indicates that the government is too optimistic, perhaps because policymakers are trying to boost business confidence. The latest round of this exercise was different, however. For the first time since the "bubble economy" period of the late 1980s, when the government's sunny projections did not quite match private-sector euphoria, Tokyo's view of economic prospects for the fiscal year that begins April 1, 2000 is less optimistic than that of a cross section of business economists.

By most past standards as well, the government is downbeat about Japan's near-term economic outlook. Its December 19 projection of a mere 1 percent price-adjusted rise in gross domestic product in FY 2000 is a scant improvement over the 0.5 percent gain contained in its original forecast for FY 1999 (see Table) or its revised 0.6 percent increase. Tokyo's economic expectations for FY 2000 are more dismal than initial government projections for any year before FY 1999.

Government's FY 2000 Economic Outlook

FY 1999

FY 1999

FY 2000

(percentage change)

Real Gross Domestic Product




-- Consumer Spending




-- Housing




-- Plant and Equipment Spending




Nominal Gross Domestic Product




Wholesale Prices




Retail Prices




(billions of dollars)

Current Account Surplus




Trade Surplus




Note:Dollar-denominated current account surplus and trade surplus projections were not included in the economic outlook. For purposes of illustration, yen-denominated figures were converted using an exchange rate of ¥111.3=$1.00 for FY 1999 and ¥105.3=$1.00 for FY 1999.

Source: Economic Planning Agency

In revising its forecast of real GDP growth in the current fiscal year to an average of 0.8 percent, the private sector, which originally expected the economy to shrink by 1.5 percent (see JEI Report No. 1B, January 8, 1999), has implicitly conceded that Tokyo's more optimistic initial estimate for FY 1999 will be closer to the mark. The same 14 financial institutions and think tanks believe that the economy will expand on average by 1.1 percent in real terms in FY 2000, slightly faster than the government's outlook. Dai-Ichi Life Insurance Research Institute, the most optimistic of the organizations recently surveyed by Nihon Keizai Shimbun, Japan's leading economic daily, expects 2.1 percent real growth, while the most pessimistic, Sumitomo Life Research Institute, says that the economy will manage at best a 0.2 percent gain. This range of estimates, while narrow, implies different views as to whether the rebound of the economy will accelerate (10 organizations) or proceed more slowly (four) in FY 2000.

Economic policymakers do not differ dramatically from the staff of the typical research organization on the anticipated components of the economy's recovery. Consumer spending, for example, generally is expected to increase at least as fast as GDP as a whole, suggesting that forecasters see it as an engine of growth. Conversely, housing is predicted to shrink in response to the winding down of some special provisions of recent stimulus packages. Both the government and a majority of private-sector forecasters also say that plant and equipment spending will rise in the low single-digit range, although four of the 14 surveyed business organizations expect a small decline.

Despite a predicted 0.9 percent gain in yen-denominated exports in FY 2000, the government expects the foreign sector to be a drag on the economy, trimming roughly 0.2 percentage point from the rise in real GDP. Moreover, measured in dollars, the current account surplus will shrink only to $108.3 billion from the $110.5 billion estimated for FY 1999. These figures, which are not part of the official outlook, were calculated using the government's assumed exchange rate.

With an appreciating yen, the current account surplus calculated in dollars grows, other factors equal. If, as may well prove to be the case, the present assumption of an average exchange rate of ¥105.3=$1.00 in FY 2000 builds in too little appreciation, the dollar-denominated surplus will be higher. On December 24 and again on January 4, Tokyo intervened on its own in foreign exchange markets in an effort to stop the yen's upward drift. Nonetheless, the Japanese currency closed 1999 in New York at ¥102.1=$1.00. It then hit a 12-month high of ¥101.6=$1.00 on the first day of trading in the new year.

Economic policymakers in Japan regard a continuing rise in the yen's value as one of the main factors that could stall or even kill the nascent recovery of the world's second-largest economy. Nikkei's forecasting arm, NEEDS, whose baseline projection for real GDP growth in FY 2000 is 1.4 percent, calculated early in 2000 that the yen's appreciation to ¥80=$1.00, roughly the value briefly reached in the spring of 1995, would shave a whopping 0.9 percentage point off the FY 2000 expansion.

The impact would be even worse if, as many Japanese forecasters assume, the yen surged because of a U.S. stock market crash, defined as a return of the Dow Jones industrial average to its 1996 level of around 6,400 from its late 1999 heights of 11,000-plus. In a December 1996 speech, Federal Reserve Board Chairman Alan Greenspan had wondered aloud whether the rise of stock prices indicated "irrational exuberance."

Such a plunge would negatively affect consumer confidence in both countries and, arguably, would create a flow of funds back to Japan, causing a stronger yen. The net effect, according to NEEDS, would be a 0.2 percent price-adjusted contraction in the Japanese economy in FY 2000. This scenario suggests that chaotic conditions in the United States — considered to be highly likely by those Japanese analysts who see an analogy between the U.S. stock market boom and Japan's bubble and its aftermath — would turn a modest Japanese expansion into renewed economic decline. In fact, though, the American economy at the end of the 1990s was considerably different than the Japanese economy in the late 1980s (see JEI Report No. 19A, May 14, 1999).

At the end of the so-called American Century, few analysts would dispute the U.S. economy's potentially enormous impact on Japan at the dawn of what in some quarters once was expected to be 100 years of Japanese economic dominance. NEEDS forecasts for the next 25 years suggest anything but hegemony. Not only will Japan's population peak in a mere seven years, but real economic growth will average only 1.6 percent annually through 2025. For a country that historically has prided itself on a high savings rate, minimal debt and low unemployment, NEEDS projections of a 70 percent contraction in savings, a doubling of government debt relative to GDP and an average unemployment rate near recent record highs are just short of shocking.

NEEDS analysts imply that their projections are optimistic, but other economic forecasting organizations are not so sure. Almost universally, experts believe that the fundamental changes recently initiated by corporate Japan could create a new surge of growth. Perhaps. But both the government's outlook for FY 2000 and private-sector predictions indicate that over the next 15 months or so, Japan's performance at the economywide level is not likely to be dramatic.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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