No. 31 — August 11, 2000


Weekly Review

--- by Douglas Ostrom

The Japanese economy continues to show steady improvement. In fact, the gross domestic product might have managed to eke out a gain in the quarter that ended June 30 despite the 10 percent annualized surge recorded in the January-March period (see JEI Report No. 23B, June 16, 2000), the starting point for the calculation of the spring GDP statistics. Of course, many problems remain. Moreover, the prognosis for the economy over the medium term is a good deal less upbeat than the outlook for the next few months.

Industrial production is one reason for optimism. According to preliminary figures, the factory output index rose 1.7 percent in June on a seasonally adjusted basis on top of a 0.3 percent gain in May. As a result, production in June was 7 percent higher than the year before. That helped to lift the index 1.6 percent in the second quarter from its January-March level. In addition, industrial shipments increased 2.5 percent in June after rising 0.7 percent in May. Consequently, inventories, which had expanded for four straight months, contracted in both May and June. If anything, manufacturers now may be tempted to boost production further to restore inventories at least to previous levels — and perhaps to higher ones — to accommodate increased demand.

Services also showed signs of life in the spring. A 0.6 percent month-to-month drop in April in the tertiary-sector index, which tracks most of the economic activity not included in the industrial production report, was offset by an identical gain in May. Although June statistics are not available, data on some of the index's components suggest another increase. Even if no change occurred, the second-quarter figure would be 0.5 percent above the January-March number.

Industrial and tertiary activities account for approximately three-quarters of national output in Japan. With gains of 1.6 percent and 0.5 percent or so, respectively, in these sectors in the spring, the whole economy presumably expanded. The Economic Planning Agency will release GDP figures for the April-June quarter in early to mid-September.

Supply-side indicators like these do not always imply the same rate of change as that derived from purchases of goods and services, even though they logically should. Consumer spending, the largest component of final demand by far, continues to be a question mark. Spending by workers' households as measured by the Management and Coordination Agency's survey of household expenditures has been down on a year-to-year basis nine times in the past 12 months, including drops of 2.1 percent in May and 3.5 percent in June. However, EPA makes considerable adjustments to these figures before using them as part of the GDP statistics.

However second-quarter expenditures ended up, labor market data give some reason to believe that consumer spending could be poised to increase later this year. The Ministry of Labor reported that total cash earnings, inclusive of overtime and bonuses, rose 1 percent in June from a year earlier. This number is important because it is the first indication of the impact of summer bonuses, which are distributed each year in June and July and account for roughly 40 percent of income in those months. Bonuses alone were up 1.7 percent from June 1999, a pattern that may or may not have held in July. Overtime — a key component of compensation for many workers, especially in the manufacturing sector — also rose in June.

Not only are Japanese workers earning somewhat more, but they also are less likely to be unemployed now than in most recent months. Joblessness rose a tenth of a percentage point in June to 4.7 percent, but this figure was lower than in any of the first four months of 2000. The unemployment rate peaked for this business cycle in February at a postwar high of 4.9 percent (see JEI Report No. 15B, April 14, 2000). The ratio of job openings to applicants, which some analysts consider a better gauge of labor market conditions, continues to improve, reaching 0.59 in June, up a seasonally adjusted 0.03 from May to the highest reading since February 1998.

Plant and equipment expenditures also appear strong. Private-sector orders other than for ships or from electric utilities registered a stronger-than-expected 14.4 percent seasonally adjusted gain in June. That boosted the data series, widely regarded as a leading indicator of capital spending, 3.1 percent in the April-June quarter.

A pessimist might ask why, if Japan's economy is in recovery mode, is its stock market so weak? The Nikkei average of 225 stocks listed on the Tokyo Stock Exchange's first section dipped August 4 to 15,667.36, the lowest closing since March 1999. Most analysts have pointed to the weakness of America's technology-heavy Nasdaq and also to the uncertainty about the fate of scores of Japanese companies in the wake of the bankruptcy of department store operator Sogo Co., Ltd. (see JEI Report No. 28B, July 21, 2000). In addition to these factors, investors may be looking beyond the next few months, noting that EPA's leading indicators, which are designed to project economic activity about six months into the future, hovered around the boom-or-bust level of 50 for the three months through June.

Tokyo's initial willingness but eventual refusal to participate in a loan workout for Sogo brings up issues beyond the treatment of the department store chain and other companies in a similar fix. First and foremost, it raises questions about the overall economic philosophy of the government of Prime Minister Yoshiro Mori. In addition to uncertainty regarding its policies vis-a-vis the still-ailing financial sector, whether or not additional fiscal stimulus steps or aggressive deregulatory actions will be initiated still is up in the air. So, too, is the very fate of Mr. Mori's administration, which continues to stumble from one embarrassment to another. In this environment, investors — apparently led by foreigners who are even more confused than their domestic counterparts — hardly can be blamed for heading for the exits, the relatively favorable current economic environment notwithstanding.

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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