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Monday, Nov. 24, 2003
Japan's economic momentum reveals private-sector progress
Japan's gross domestic product for the July-September quarter, according to preliminary figures released by the Cabinet Office on Nov. 14, grew 0.6 over the previous quarter for an annualized expansion of 2.5 percent. Some have pointed out that this was slower than in the April-June quarter, when the GDP expanded 0.9 percent, but we should note that the nation's 0.6 percent growth was achieved on top of that strong performance.
The July-September GDP also represents a 2.5 percent growth over the same period last year. Here, I would like to look into the various elements that constitute the current uptrend in the Japanese economy.
The first major characteristic of this growth is that it is being driven by the private sector. Whereas private-sector demand in the July-September period rose 3.1 percent from a year ago, capital formation in the public sector fell 12.6 percent. Private-sector demand more than offset the negative elements in the public sector.
Second, this private-sector growth is being led by a recovery in corporate earnings. While the nation's nominal GDP has shown little growth, corporate profits have shown double-digit increases -- a result of painful efforts made by corporate managers. The stronger earnings are reflected in the recent pickup in Tokyo share prices, which have led to an improvement in the quality of bank assets and made it easier for banks to dispose of their nonperforming loans.
On the other hand, public-sector reforms and streamlining are making little progress, and government consumption remains almost unchanged from a year ago. While the reform of Japan Highway Public Corp. is garnering plenty of media attention, it is only the tip of a massive iceberg.
The third feature of the current economic upturn is the recovery in private-sector capital investment, which grew 14.2 percent compared with the same period last year.
Companies are now investing anew because they have disposed of obsolete, uncompetitive facilities and increased their cash flow with improved earnings. In the past, Japanese firms tended to use extra cash flow to repay debt, but now they appear to have finally started using this available cash on new spending.
As the aging of the Japanese population continues, huge potential demand is welling up in the medical and nursing-care sectors. The key to structurally reforming the economy will be to shift funds to these growing sectors from industries that are no longer competitive. Further deregulation is necessary to achieve that goal.
One worrisome factor here is that you can't know for sure whether Japanese companies will continue to make capital expenditures domestically. This is a problem all industrialized countries must confront. To survive global competition, corporations will plant their money where land and labor costs are lower. Corporate investment in areas outside Japan will not contribute directly to Japan's GDP.
The fourth characteristic I would like to mention is consumer spending, which accounts for roughly 60 percent of GDP and remains almost flat.
Private consumption has so far prevented the overall economy from falling sharply, but it will likely take some time before the nation can witness a full-scale recovery in consumer spending.
The situation is similar to the pattern the United States followed from 1992 to 1993. At that time, the U.S. economy, where companies tend to resort to layoffs and downsizing more readily than other industrialized nations, recovered more quickly than the Japanese and European economies did because it made information technology-related investments. But it took roughly 2 1/2 years for the full effects of the U.S. economic upturn to spread to American consumers in general.
Furthermore, uncertainties over pension reform and aging in Japan have put a brake on consumer spending.
In addition to the need to streamline public-sector businesses, I would like to point out that something must be done about their mounting debts, which are now high as 700 trillion yen. While Japan's inflation rate remains roughly zero, the yield on government bonds has climbed to around 1.5 percent -- a warning from capital markets that the continuing rise in Japan's outstanding government bonds is unhealthy.
The key task for the administration of Prime Minister Junichiro Koizumi will be to nurture the buds of reform in the private sector, while downsizing the inefficient public sector.
Japan's economy has achieved growth for seven quarters in a row, and Jean-Claude Trichet of France, the new president of the European Central Bank, has admitted that the European economy is lagging behind those of Japan and the U.S. At least Japan has succeeded in establishing the basis for further structural reform.
Teruhiko Mano is an adviser to Tokyo Research International Ltd.