No. 7 — February 18, 2000

 

Weekly Review

NEW REPORTS DAMPEN ECONOMIC EXPECTATIONS IN JAPAN OR DO THEY?
--- by Douglas Ostrom

Economic Planning Agency chief Taichi Sakaiya got the attention of the foreign press when he said February 6 that Japan's gross domestic product probably shrank significantly in the last three months of 1999. This unofficial projection — preliminary figures will be released in March — put the government's top economist in sync with private forecasters who have been saying much the same thing. Foreign analysts claimed that Mr. Sakaiya's comments were tantamount to admitting that Japan again was in a recession given the drop in GDP in the third quarter (see JEI Report No. 46B, December 10, 1999). In the United States, downturns are defined informally as two consecutive quarters of economic shrinkage.

Few Japanese experts jumped to the same conclusion, however, least of all those at EPA. Eight days later, the agency released its February economic report, which in some ways seemed to support the "recession is back" view. The report's authors began by noting that both consumer spending — the largest single component of GDP — and housing expenditures declined in December. Public-sector spending was down as well. While plant and equipment outlays showed some signs of a turnaround, they, too, still were falling. These sectors account for roughly 90 percent of Japan's economy, yet EPA summarized developments by saying that yuruyakana kaizen (moderate improvement) continued to characterize conditions — the same language used in its four previous monthly reports.

Those who believe that Japan again is in a recession are not likely to be swayed by the EPA assessment, particularly since it supplies so much ammunition for their point of view. Yet the report as well as other economic data also provide reason to accept a more qualified overall conclusion. For one thing, neither Mr. Sakaiya nor other experts know exactly what the fourth-quarter GDP number will look like. As recently as last June, the economy's performance on a quarterly basis was 2 percentage points better than generally had been expected. At that time, Mr. Sakaiya included himself in the group that was surprised. Thus, given past experience, growth is a possibility.

Perhaps because the GDP figure is so hard to predict and so long in coming — October-December data for the United States were released in January — most analysts in Japan use a different set of information to assess the economy. While these numbers by no means are consistently upbeat, they do suggest that a more nuanced interpretation might be in order.

Leading the list of more positive indicators is industrial production. This yardstick, which measures output primarily in the important manufacturing sector, rose 0.8 percent in the October-December period on an official, quarter-to-quarter, seasonally adjusted basis despite a small decline in the last month of the year. The alternative seasonal adjustment process employed by the Japan Economic Institute yields much the same result. In addition, inventory levels have continued to fall in recent months, suggesting that manufacturers could boost production to meet existing levels of demand. Finally, the tertiary-sector index, which tracks the majority of economic activity not covered by the factory production index, posted a seasonally adjusted, month-to-month gain of 0.6 percent in November, the most recent month for which data are available, nearly offsetting a drop of 0.7 percent in October.

EPA's figures on machinery orders other than for ships or from the electric power industry, a key indicator of future investment, have been another surprisingly upbeat series. Contrary to estimates of a sharp drop, the index rose 16.1 percent in December from November, yielding a 9.9 percent jump for the fourth quarter against a projected 2.8 percent decline (see JEI Report No. 4B, January 28, 2000).

Most of the problems in terms of aggregate demand are in the consumer spending area. EPA noted that both department store and chain store sales as well as personal consumption data from the Management and Coordination Agency's Family Income and Expenditure Survey showed drop-offs in at least November and December compared to year-earlier levels. The FIES report forms an important component of the GDP data, suggesting one reason why Mr. Sakaiya and others expect a contraction for the fourth quarter. Yet EPA supplements the FIES information with other spending data that can reverse the trend.

Even if these numbers provided an accurate reading of consumer sentiment at the close of 1999, they are not necessarily equally meaningful going forward. Yearend bonuses, which are a major part of employee compensation, were off a preliminary 5 percent in December from a year earlier at firms with more than five employees — a result that arguably suppresses consumer spending. However, other elements of compensation, including regular wages and salaries, as well as employment decreased modestly, if at all. Seasonally adjusted unemployment, for example, rose to 4.6 percent from 4.5 percent. In coming months, bonuses will be much less of a factor, raising the possibility that the end of 1999 was something of an aberration.

The net result of all these readings is cautious optimism on the part of officials in Tokyo as reflected in the overall EPA evaluation of yuruyakana kaizen. Agency spokespeople said in mid-February that there was a good chance the economy would grow in the January-March period. Bank of Japan officials, in a separate February 15 report, took the same line. Asked at a news conference whether the central bank had upgraded its economic assessment, Governor Masaru Hayami replied, "[y]es, it has gradually become brighter."

No one thinks that the world's second-biggest economy is out of the woods, of course. BOJ policymakers are expected to continue the bank's zero interest-rate policy, probably for the rest of 2000. Nor is Tokyo's activist spending strategy likely to change soon. Finance Minister Kiichi Miyazawa told reporters February 15 that "even if the economy were to improve steadily in 2001, I do not think that we could plan to reconstruct Japan's fiscal position as early as 2002."

Mr. Sakaiya talked of a marked improvement in the economy by next October — a date whose significance presumably did not go unnoticed by Prime Minister Keizo Obuchi and other politicians who must face elections by that time. Members of the coalition government have to hope that the EPA chief's mid-February description of the economy as entering a period of dawn, albeit a rainy one with darkened skies, becomes a bit less ambiguous by election day.

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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