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Monday, March 29, 2004

JAPANESE PERSPECTIVES

Hooked on China's seven percent solution


For Mr. Sherlock Holmes, a seven percent solution provides solace in times of intellectual inactivity, when the game's not afoot, and his brain craves for stimulus. On those occasions, he turns to a seven percent solution of cocaine injected into the forearm to compensate for the lack of vibrant mental activity.

Nearby, his ever faithful friend and trusted colleague Dr. Watson looks on in increasing anxiety, lest this morbid pastime lead to permanent damage in the tissues of the great detective's unsurpassed brain.

While the Japanese government most certainly does not possess the brain power of Mr. Holmes, it does seem to share his preference for the seven percent solution.

Back in the 1970s, when the world stood on the brink of synchronized recession, the government of then Prime Minister Takeo Fukuda pledged itself to a seven percent economic growth rate, as a solution to the woes of both Japan and the rest of the world. The pledge was wildly optimistic, to say the least.

More than 30 years on, the seven percent solution is back. Figures released last month have it that Japan's GDP grew by an annualized 6.6 percent in the final quarter of 2003. Not quite seven percent, but close.

To be sure, there is no arguing the fact that the very nearly seven percent growth is a more than respectable indication of improving economic circumstances. Yet the story the figure tells is a complex one.

For one, what we now have looks very much to be something of a "gainless" recovery. "No pain, no gain," said Mr. Koizumi when he first came into power.

Well, we have certainly had plenty of the pain thus far, and now hope is rising that the nearly seven percent solution will at last bring on a bit of the gain. For some, that may come true. But for the majority, the gain looks to remain a moving target -- so close but is forever just out of reach.

Global competition remains tough, and cost-cutting looks to be a permanent feature of corporate survival tactics. Production may be on the rise, and companies and people may be feeling busy again, but those circumstances are not leading to rapidly improving profit margins, nor to markedly better take-home pay. Another fascinating feature of what is happening in Japan at the moment, is that the recovery is being led by the most unexpected players within the economy. Steel and shipbuilding are among the star players in the current bout of economic action. Pronounced all but dead for some time, the smokestack industries are suddenly back in the limelight.

The reason for this is all too obvious. It is to the booming Chinese economy to which we owe this revival of fortune for the heavier industries. Economic development has come in a big way to our very big next-door neighbor and they need all the steel, ships and even coal they can lay their hands on. That is fine.

Yet the other side of that coin is that if something does goes wrong in China, the gainless recovery we now have will all too quickly turn into a painful downturn once more. Moreover, the very nearly seven percent growth may turn out to be just as much of a problem as Mr. Fukuda's version if it provides the current government with enough false ammunition to claim victory over Japan's structural woes.

In that event, the latest seven percent solution will become a deadly poison that saps Japan's longer-term economic strength and leads to the "permanent weakness" that Dr. Watson so fretted over in regard to his eminent friend.

Noriko Hama is an economist and a professor at Doshi sha University School of Management.


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The Japan Times

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