No. 24 — June 23, 2000


Weekly Review

--- by Douglas Ostrom

Japan's economy is on the mend — at least according to a recent Economic Planning Agency report and a declaration from an EPA advisory group. While many independent analysts tend to agree with the official assessment, they also suspect that the agency may be overstating the case ahead of the June 25 elections for the lower house of the Diet.

Analysts typically read the words in EPA's monthly economic wrap-up much as they would tea leaves in an effort to understand the government's thinking and, consequently, to divine the future direction of economic policy. The June analysis, which was leaked five days before its scheduled June 20 release date, describes the movement toward a self-sustaining recovery as becoming pronounced. At the time, EPA officials denied that such language was tantamount to declaring that a recovery was underway.

That job fell to another group, an EPA panel of seven academics chaired by veteran Tokyo International University Professor Miyohei Shinohara. When the Economic Dates Examination Committee met June 19, it tentatively determined that the economy had hit bottom in April 1999 and thereby had completed the latest of 12 official business cycles that began with a four-month downturn in 1951. This finding indicates that Japan's most recent recession ran from March 1997 to April 1999, making it the third-longest slump since World War II.

Western analysts have a different take on Japan's latest business cycle. They note that beginning last July, the country experienced back-to-back declines in quarterly gross domestic product. In the conventional view popular in the United States, the GDP numbers imply that another recession began only three months after the EPA panel's designated endpoint. More generally, many foreign experts believe that the world's second-largest economy has endured nearly a decade of stagnation, arguably starting in late 1990. The official position is that the economy was in a recovery mode between October 1993 and March 1997.

The dating of recessions and expansions in Japan is based in part on EPA's indices of leading, coincident and lagging indicators. Revisions announced June 15 just ahead of the committee meeting reversed for a second time the conclusions drawn from the lagging indicators for February and March. According to now-complete data, they recovered to the point that is the dividing line between bust and boom. Preliminary data for April put the lagging indicators above that level, providing a modest confirmation of the results shown by the coincident indicators, which continue to rise sharply. The mid-June changes allowed the Japanese press to trumpet twice in one month the fact that the lagging indicators for February and March had reached 50 or higher. Largely unreported was the intermediate revision that put them below 50.

The timing of these announcements has raised questions both at home and abroad about political influence on EPA before the critical lower house elections. The doubts loom particularly large in light of the agency's controversial calculation of capital spending for the October-December 1999 period and the resulting size of the decline in that quarter's GDP (see JEI Report No. 22B, June 9, 2000). However, since the information in question was released generally on the normal schedule, analysts cannot effectively argue that EPA behaved improperly, although the leak of the June economic report might have been an effort to force the hand of the advisory group. Of course, both EPA's encouraging assessment and the committee's declaration that the recession was over ultimately were judgment calls. Consciously or not, such decisions might have been affected by the impending elections. Moreover, unnamed EPA officials recently have claimed that some of the agency's prior economic evaluations were colored by political considerations.

Defenders of the agency have pointed to the remarkable 10 percent GDP growth registered in the first quarter of 2000 as strong evidence that the call regarding a recovery is correct (see JEI Report No. 23B, June 16, 2000). EPA's critics certainly could respond by asking why, if GDP is such a good gauge of economic ups and downs, did the panel date the recovery as having begun just before a sustained plunge in this measure?

Perhaps more important is the question of EPA's conclusions and policy recommendations going forward. While its members have not said as much, the Economic Dates Examination Committee might have focused, as Japanese analysts often do, on year-to-year changes in economic magnitudes rather than on seasonally adjusted changes over shorter periods — the preference of foreign analysts.

Different data series reveal diverse trends depending on which information is used. For example, industrial production in the January-April period was 6.3 percent higher than the comparable 1999 figure, but factory output was off in three of the four most recent four-month periods on a seasonally adjusted basis. Likewise, inventories dropped 1.4 percent in April from the year-earlier level, a bullish sign meaning that manufacturers may have to add production to restore stocks. However, on a month-to-month, seasonally adjusted basis, inventories increased for four straight months through April, suggesting that the opposite response also is possible.

If, as foreign analysts have argued, the bureaucracy's traditional focus on year-to-year changes makes it too slow to identify economic turning points, government experts could be missing the accumulating evidence that another recession is coming sooner rather than later. Indeed, Robert Feldman of the Tokyo office of Morgan Stanley Dean Witter & Co. argued in mid-June that the next downturn — using the Japanese definition — could occur as early as September.

Mr. Feldman remains much more pessimistic about the near-term prospects for Japan's economy than his Japanese counterparts. He expects 0.8 percent inflation-adjusted growth in FY 2000, which began April 1, followed by 0.4 percent shrinkage in FY 2001. By contrast, a Nihon Keizai Shimbun survey of 15 Japanese think tanks published in mid-January produced an average forecast of 1.7 percent real growth in the year through March 31, 2001 and a 1.8 percent GDP gain the next year. Not only are these projections far more upbeat than most foreign predictions, they also exceed Tokyo's expected 1 percent expansion during the current fiscal year.

After 10 years of dismal economic performance in Japan, voters are not likely to buy the argument that roses have bloomed in abundance only days before the lower house elections. They also may be disinclined to believe even the government's relatively objective economic data. In any event, given the very different forecasts of the economy's near-term prospects and voters' understandable inclination to punish those responsible for the problems, the electorate's June 25 decisionmaking will not be easy.

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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