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Monday, Oct. 6, 2003

Japan's priority: offsetting pull toward jobless recovery

U.S. President George W. Bush's military unilateralism has destabilized the world order to such an extent that, facing a dearth of low-risk, high-return investments, Western investors have descended on the Japanese stock market.

Japanese interest rates are unprecedentedly low and among the lowest by international standards. This condition should have led to rising stock prices over most of the past year if economic theories are correct. Yet the bellwether Nikkei average on the Tokyo Stock Exchange plunged to a "postbubble" low of 7,607 on April 28, down 80 percent from its all-time high of 38,916 posted in December 1989. The decline mirrored the sharp fall on the New York Stock Exchange following the outbreak of the Iraq war in March.

Recently, though, foreign investors have viewed Tokyo stock prices as undervalued in relation to Japanese economic fundamentals and as likely to make substantial gains. With Japanese politics considered stable and likely to remain so (aside from the threat of North Korea's nuclear arms), with Japanese manufacturers blessed with technical prowess and with banks successfully reducing their pile of bad loans, the Japanese stock market looked set to offer the lowest-risk, highest-return investments in the world.

So, in the third week of April, just before the Nikkei average hit the postbubble low, foreign investors turned into net buyers. In July their net buying hit a record $1.707 trillion. For the first eight months of 2003, foreign investors' net purchases totaled 5.319 trillion yen. Meanwhile, Japanese investors, both institutional and individual, were net sellers.

At the end of August the Nikkei average topped 10,000, up 36 percent from the April low. In the same period, the yen's value against the dollar rose to 112 yen from 119 yen. The fluctuations provided substantial returns for foreign investors.

It would not be off the mark to speculate that the six-nation talks held in August regarding North Korea's nuclear threat was intended to lower investment risks in Japan.

In 1999, foreign investors' net purchases hit a record 9 trillion yen after the Nikkei average had fallen to the then-postbubble low of 13,842 at the end of 1998. In late March 2000, the average shot up to 20,337. Foreign investors then turned to profit-taking, posting net sales of 2 trillion yen in 2000. From April 2000, stock prices started tumbling until they hit the postbubble low in April.

Foreign investors, whose active buying caused Japanese stock prices to bottom out, have always had a strong impact on the local stock market. I believe that foreign investors, many of them seekers of short-term capital gains on hedge funds, will launch massive selling in the not-too-distant future to take profits. This will no doubt cause stock prices to dive again.

The real question is whether the recovery of the economy is self-sustaining enough to justify the current high stock prices. In my view, Japan is gradually changing into a postindustrial society. The new society will reform production and management processes with new information technologies and will be mainly supported by financial, telecommunications and information industries. Drastic cutbacks in labor will be mandatory.

The shift to a postindustrial society will make industrial structure reform inevitable. Manufacturing industries will be forced to restructure themselves for survival. It would be good if nonmanufacturing industries could absorb the surplus labor in manufacturing, but they will hardly be in a position to do so because they are weak and uncompetitive internationally.

Labor mismatches between industrial sectors will be a problem, as labor transfers from manufacturing to nonmanufacturing industries becomes difficult. Japan's economic recovery -- if it happens -- is likely to be "jobless recovery."

As long as the unemployment rate remains high, consumer spending will be sluggish, and an economic upturn in itself will not spur a strong rise in employment. Product-assembly industries will increasingly shift production bases to overseas locations. The priority task in economic management of the postindustrial society should be the creation of employment opportunities.

Takamitsu Sawa, professor of economics at Kyoto University, is also the director of the university's Institute of Economic Research.

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