No. 14 — April 7, 2000


Weekly Review

--- by Douglas Ostrom

Whether the Japanese economy is contracting or expanding remains a question without a definitive answer. The results of the Bank of Japan's April 3 tankan (survey of short-term business prospects) did little to clear up the controversy. They indicated that corporations, especially big manufacturers, had grown more confident over the previous three months but still were basically pessimistic. Moreover, the firms included in the tankan's initial survey of capital spending plans for FY 2000 said that they would trim investment even below the depressed levels of the fiscal year that just ended. Participants also revealed that they still had excess employees despite record-high unemployment.

The tankan's headline statistic is a measure of the degree of business confidence among large manufacturing concerns, calculated by subtracting the percentage of pessimistic responses from optimistic ones. At minus 9, the April diffusion index was an improvement from the minus 17 of the survey released in December (see JEI Report No. 47B, December 17, 1999). This outcome fit into private-sector economists' forecast range of minus 7 to minus 14. The fact remains, however, that the index continued to read negative. Smaller manufacturers and nonmanufacturers also reported more confidence about their prospects during the February-March survey period but by narrower margins than big manufacturing companies.

In the past, trends in the confidence factor have correlated more closely with the economy's ups and downs than has the level itself. As such, the new finding lends support to those who argue that a recovery is underway. However, as a psychological reading, the tankan can be swayed by policymakers who would like to convince businesses and consumers that a rebound is in progress even when the evidence is contradictory. Some analysts have suggested that Tokyo is engaged in just that strategy. They point out that Economic Planning Agency officials glossed over the news that the gross domestic product had shrunk in the October-December 1999 period on top of a contraction in the previous quarter, which met the traditional American criteria for a recession, and highlighted instead positive developments on the economic front in the opening months of 2000 (see JEI Report No. 11B, March 17, 2000).

While most of the dozen or so tankan statistics were upbeat in the latest survey, some of the most important ones signaled that all is not well. For instance, many press accounts noted that large manufacturers reported plans to boost plant and equipment spending 4.9 percent in FY 2000, but they failed to acknowledge the more make-or-break finding that firms of all sizes across all industries expect to cut investment 1.1 percent. This pessimism is especially troubling given projected FY 1999 outlays, which were less than predicted even three months ago.

Regardless of size, tankan respondents also felt by a margin of 14 percentage points that they had too many employees. While that was a decline of 4 points from the tally of three months before, the longer executives believe that their companies have surplus workers, the more likely are they to do something about the situation. This prospect suggests, in turn, that unemployment, which hit a postwar record of 4.9 percent in February, according to seasonally adjusted data released March 31 by the Management and Coordination Agency, could go even higher. In this event, consumer confidence, already weak, could take another hit.

Tankan participants expected pickups of 2.6 percent in sales and 15.7 percent in profits in FY 2000, building on the 14.3 percent rise projected for FY 1999. Yet they apparently plan to keep hiring below replacement rates and to reduce capital spending. The obvious question, then, is who will their customers be? The workers they are not hiring? Other businesses that also are curtailing expenditures?

The only remaining alternatives are the government and foreigners. Although the FY 2000 general account budget is stimulative (see JEI Report No. 13B, March 31, 2000), policymakers and influential politicians talk as if the days of never-ending pump-priming are about over. Just-elected Prime Minister Yoshiro Mori is not thought to belong to the camp of people who would like to hasten that day, but the question of additional stimulus no doubt will be on his cabinet's near-term agenda along with a host of other initiatives promoted by the administration of ailing former Prime Minister Keizo Obuchi.

In terms of the foreign sector, Tokyo appears eager to ensure that, at a minimum, it is not a drag on aggregate demand. In March, before the tankan findings were announced but after forecasts had surfaced of a relatively upbeat survey, the Bank of Japan, acting on behalf of the Ministry of Finance, had intervened in currency markets to counter the latest appreciation of the yen. Partly as a consequence, Japan's foreign exchange reserves jumped $11 billion in March to $305.5 billion, the highest total ever. After the tankan was released April 3, Tokyo sold another estimated $10 billion worth of yen for dollars. As a result, in early April, the Japanese currency had returned again to its typical level of recent weeks — close to the middle of the ¥100 to ¥110=$1.00 range.

The central bank's early April action suggested that, despite the modestly optimistic tankan results, Tokyo remains deeply worried about the ability of the economy to maintain sustained, private-sector, domestic demand-led growth. From Washington's standpoint, Japan is not yet ready to assume its proper role as one of the engines of global economic expansion. While the world's second-largest economy may be in recovery, the July-December 1999 GDP figures notwithstanding, it is doing so at a pace that Clinton administration economic decisionmakers believe leaves little margin for spillover into increased demand for foreign goods and services.

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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