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Thursday, Sept. 9, 1999

Experts differ over forces behind positive GDP data


By HIROSHI YAMAGIWA and TOMOKO OTAKE

Staff writers

The gross domestic product data released Thursday indicate Japan's economy may be bottoming out at last.

But much of the 0.2 percent growth in the April-June quarter was the result of the government's economic-stimulus measures -- and government officials and many private-sector economists agree that more public spending is necessary to keep the economy moving.

"The momentum of economic growth is stronger than I had expected," said Masaru Takagi, a professor at Meiji University. Takagi has said that the nation's economy reached its bottom around December.

"Today's GDP figures endorse that the economy has entered a recovery track, albeit gradually," he said. He revised his growth forecast for the year to March 2000 upward to 1.5 percent from 1 percent.

Judging by the expansion in private consumption and housing investment, it has become clear that the economy is led by private demand, rather than public demand, he said.

But others, including Economic Planning Agency chief Taichi Sakaiya, do not agree.

Housing investment, up a record 16.1 percent from the previous quarter, was obviously helped by government policies -- expanded tax deductions on housing loans and lowered interest rates on government housing loans.

At a Tokyo news conference, Sakaiya bracketed public investment and housing investment together as policy-driven, and coupled corporate investment and private consumption together as private sector-led. In each bracket, the shrinking of one item roughly cancels out the growth of another.

"Therefore, we cannot say private demand is strong at all," he said.

Many economists consider the 4 percent drop in corporate investment and the 4 percent fall in public investment as seeds of concern.

Akiyoshi Takumori, chief economist at Sakura Securities Co., said the shrinking capital investment is serious but not hopeless. He considered it a backlash from the 3.1 percent rise logged the previous quarter.

If anything, there is a "small ray of hope" for small and medium-size firms, judging by a Finance Ministry survey released Tuesday that constitutes part of the GDP data, he said.

According to the survey, the year-on-year rate of decline in capital investment by firms with capital between 10 million yen and 100 million yen has slowed markedly, from minus 38.1 percent in the October-December quarter to minus 5.3 percent in April-June. The average capital investment for all firms shrank 13.4 percent in the April-June quarter.

Capital investment in the July-September quarter may expand on a quarter-on-quarter basis, judging from some leading indicators, Takumori predicted. But that growth may more than cancel out the expected decline in housing investment because of a backlash from the latest surge, he added.

While the amount of public investment was the fourth-largest on record, the 4 percent plunge from the previous quarter is an "ominous sign," Takumori said.

The effects of public works are expected to wear out during the January-March quarter, which is why the government has been considering another supplementary budget.

Kenji Sone, a senior economist at the Industrial Bank of Japan, called for another round of public works spending as early as possible.

"Although I do not think the scale of economic stimulus measures should be as big as last fall's," Sone said, "the second supplementary budget should be executed as soon as possible so its effect could be felt by the end of the current fiscal year (ending March 31, 2000)."

Takumori argued the extra budget should be about 4 trillion yen to 5 trillion yen to keep public investment moving.

He also stressed that the budget must be designed to promote structural reforms, echoing comments by the EPA's Sakaiya.

Among fiscal policies, monetary policy is also considered important.

Meiji University's Takagi said the Bank of Japan should continue its near-zero interest rate policy until around the end of the year because deflationary pressure is still strong.

Hideya Kubo, senior economist at the NLI Research Institute, said that is not enough. He suggested the BOJ further ease its monetary policy and inject more money into the market to curb the yen's rise.

The yen's recent surge against the dollar is hurting many of the nation's major manufacturers that rely on exports, and the economy's steady recovery hinges on the exchange rate, he said.

"There are few factors in the market that can stop the yen from rising at the moment," Kubo said. "Foreign investors, especially, now see the Japanese economy in such a glorified view."

The GDP data will further accelerate buying of Japanese stocks and yen by foreigners, he said.

Further monetary easing could be achieved by various means, such as stepping up the outright purchase of Japanese government bonds and engaging in so-called unsterilized currency market intervention, in which yen sold to buy dollars are left in the market, he explained.



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