No. 1 — January 12, 1996


Weekly Review

--- by Douglas Ostrom

The go-go days are over — for good. That seems to be the message implicit in the figures contained in the latest Japanese government economic outlook when combined with nongovernmental forecasts regarding the performance of the economy in the mid-1990s. The outlook, a result of a consensus among Japanese government agencies regarding economic prospects for the fiscal year beginning April 1, received cabinet approval December 19.

Compared even with the modest expectations of a year ago, when Tokyo anticipated that price-adjusted gross domestic product would increase 2.8 percent during FY 1995, the official projection that real growth will equal a mere 2.5 percent in the coming fiscal year (see Table) is indicative of rising pessimism. (Tokyo's revised FY 1995 expectation is for real GDP growth of 1.2 percent.) The realization of such a low rate probably would put Japan in the bottom ranks of the industrialized nations belonging to the Organization for Economic Cooperation and Development. This would be a particularly surprising development in that Japan might be expected to do fairly well relative to the 24 other OECD nations this year, if only because its recovery is probably in the early stages; in contrast, the economic expansion in the United States will be in its sixth year. The comparison with Japan itself a decade ago, when the economy expanded in excess of 2.5 percent even during what were described as recessions, is more striking. Yet, a variety of private-sector and foreign forecasters believe Tokyo may be too optimistic regarding FY 1996.

Tokyo expects corporate capital spending to lead the way toward recovery in the coming fiscal year, rising a price-adjusted 4.1 percent on top of an expected 1.8 percent rise in FY 1995. The increase this fiscal year, if it materializes, will be the first in four years, however. A variety of private-sector investment surveys, most of which focus on large firms, support the expectation of an upswing. Small companies, which by all accounts are less enthusiastic about increasing plant and equipment expenditures, may well reduce their outlays in the coming year. As a consequence, an increase in capital spending of the magnitude expected by Tokyo cannot be taken as a sure thing.

Clinton administration officials are likely to be modestly pleased regarding Tokyo's expectations for the FY 1996 current account surplus. Not only has Tokyo scaled back the projected imbalance over the April 1995-March 1996 period to $105 billion from the $122 billion expected a year ago, but it also expects the FY 1996 surplus to drop another $10 billion to $95 billion, the first dip (if realized) below $100 billion since FY 1991. One reason for the projected declines is the appreciation of the yen since 1993, which has made Japanese exports less competitive in world markets and led to soaring imports.

The economic outlook is, among other things, part of the budget planning process in Japan. Yet, it does not include explicit projections regarding the level of government spending. Neither are private- and public-sector inventory levels specified. In that respect Tokyo's apparent assumptions regarding these activities may be surprising in light of the relatively slow growth anticipated. Based on the projected GDP totals for FY 1995 and FY 1996 as well as the components of GDP that are specified in the Table, the government expects the nominal sum of public spending plus inventory accumulation to contract 1.3 percent in FY 1996. Using the overall GDP deflator, this figure translates into a 1.5 percent real decline. Given that government spending is many times larger than inventory accumulation, the clear impression given by the outlook is that Tokyo expects government spending to decline in the coming fiscal year, reducing by as much as half a percentage point both nominal and real GDP growth. Of course, should the current economic stagnation continue, the government could implement additional stimulus packages that would minimize or even reverse the implicit downward trend in government expenditures.

If nongovernmental forecasters are to be believed, such a midcourse correction may prove necessary. Twenty-six Japanese private-sector forecasts released in the two weeks prior to the announcement of the government outlook offered projections, on average, of real GDP growth equal to 1.9 percent in FY 1996. Similarly, the OECD's December 19 forecast for Japan, although revised upward by 0.2 percentage point from a projection announced only days earlier, comes in at 2 percent for the year that began January 1. The international organization estimates that Japan's real GDP grew 0.3 percent in 1995.

The OECD figures also put Japan's expected economic performance in international perspective. The American economy, despite numerous signs of slowing and the maturity of the recovery that began in late 1991, is expected to outperform that of Japan in 1996 and 1997 — just as it has every year since 1992, the OECD projections imply. Even in 1997, when the Japanese economy is predicted finally to pick up speed and to expand 2.7 percent, OECD forecasters expect that the growth rate still will be below the 2.8 percent anticipated for this country. Similarly, Japanese growth will lag the average forecast for the group of 25 OECD nations both this year, 2.6 percent, and next, 2.8 percent.

All economic forecasts are subject to a wide range of error, of course. In recent years nearly all predictions regarding the Japanese economy — both from Japanese and foreign sources — have proven to be too optimistic. For example, in late 1993 Tokyo indicated that real FY 1994 growth would equal 2.4 percent; it then downgraded the projection to 1.7 percent a year ago, three months before FY 1994 ended. The actual figure turned out to be 0.6 percent. By contrast, a solid economic recovery, if and when it comes, is likely to prove far stronger than forecast. Despite these caveats, the accumulating evidence is that the 1990s will go down as the decade in which the Japanese economy ended its more than 40-year run as a star performer among the world's industrial nations.

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

Top aaaa Issue Index aaaa 1996 Archive Indexaaaa Search aaaa Subscriber Area aaaa Home