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Monday, Sept. 1, 2003

JAPANESE PERSPECTIVES

Surge in JGB issuance proves need for Koizumi reform drive


The preliminary GDP figures for the latest quarter, released Aug. 12, show that Japan's economy grew at an annualized rate of 2.3 percent in the April-June period. The economy is on a continuing uptrend, with GDP having expanded six quarters in a row since the January-March period of last year.

On the Tokyo Stock Exchange, the Nikkei average, which was recently wallowing below 9,000, has rallied above 10,000, while the yield on the Japanese government bond has shot up from its recent bottom of around 0.4 percent into the 1.4 percent range. Share prices are also recovering in most of the major markets throughout Asia, Europe and the United States.

For example, the Topix index is now 3.64 percent higher than a year ago, the Dow Jones Industrial Average in New York 9.72 percent higher, the SX5P index of European stocks 3.65 percent lower, and AS51 index of Asian stocks 3.89 percent higher. Although European stocks are still lower than they were a year ago, they've been on an uptrend since setting a low for the year in March.

It is natural for share prices and bond yields to go up as the economy improves. But in Japan's case, there is another major factor behind the rise in share prices and JGB yields (or JGB price declines). And that is the increase in the amount of outstanding government bonds, which is proof of insufficient public-sector reform.

Of course, there is also the all-out streamlining being carried out by the private sector. An increasing number of Japanese firms are reporting record profits, which is pushing up the entire stock market by offsetting and beating back the downward pressure being exerted by stocks in stagnant industries where reform is lagging behind.

On the other hand, progress remains slow in streamlining public sectors that are reliant on funds raised through government bonds. In the world of the Japanese bureaucracy, narrow departmental interests still get priority over the broader goals of ministries or agencies, while the reform initiatives of Prime Minister Junichiro Koizumi are delayed by resistance organized by politicians with vested interests. All these problems are evidenced by the continuing rise in outstanding government bonds, which has mushroomed to 150 percent of GDP. If the nation's sovereign credit rating is downgraded further, JGBs will be classified as risk assets under the Bank of International Settlements' regulations, which could possibly trigger a collapse in share prices. We must not forget that this fundamental problem is what is behind the fall in JGB prices. Our fiscal debt is a serious issue that should be debated by those running for president of the Liberal Democratic Party.

That Japan is lagging in public-sector reform is also reflected in its GDP statistics. A close look reveals that the real-term figures are higher than the nominal ones in all private-sector categories, such as consumption, household spending and corporate investment.

But in government-sector spending, the real-term figure shows a contraction of 0.4 percent while the nominal figure shows growth of 0.6 percent. This means the government paid a hefty price for goods and services with lower real-term value.

The Cabinet Office argues that the gap is mainly due to the change in the timing of bonus payments for government employees, but that alone does not explain the situation. These figures show that the government sector isn't doing what the private sector is -- taking painful cost-cutting measures.

In Japan, people tend to put more emphasis on business indicators than GDP. The government and the Bank of Japan continue to say the economy is "roughly flat," even though they are beginning to use more positive words like "one step upward" or "signs of change."

True, their cautious attitude is understandable, given the nonperforming-loan mess in the banking sector and other problems. However, the general theory is that recession is a term that should be only be used when a nation suffers a real-term GDP contraction for two consecutive quarters. Japan's GDP has grown for six consecutive quarters, and the ratio of contribution from domestic demand is rising. If Prime Minister Koizumi is to be re-elected and pursue his reform drive, I believe Japan's real economy warrants a more positive assessment.

Teruhiko Mano is an adviser to Tokyo Research International Ltd.


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