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Wednesday, March 10, 2004

Has Japan's economy turned the corner?

Experts find cause for both optimism and pessimism amid current surge

Staff writer

LONDON -- Japan's economy appears to be on the path to recovery, as evidenced by the annualized 7 percent GDP growth the last quarter, and there are indications this uptrend is different from those in recent years, which proved short-lived.

News photo
Panelists at a Feb. 25 symposium at the Chatham House in London -- (from left) Hajime Sasaki, Ron Dore, and Akira Kojima -- discuss the state of Japan's economy and its future prospects.   PHOTO COURTESY OF THE ROYAL INSTITUTE OF INTERNATIONAL AFFAIRS

But does it mean Japan has overcome its more deep-rooted woes like deflation and has laid the groundwork for a longer-term revival?

That was the major question discussed by Japanese and British experts during a Feb. 25 symposium at the Chatham House in London.

The symposium, jointly organized by the Asia Program of the Royal Institute of International Affairs and Japan's Keizai Koho Center, dealt with the theme "Reforming Japan: Has the corner finally been turned?"

Hajime Sasaki, chairman of NEC Corp., opened the discussion with a positive note, quoting from the monthly economic report released by the Japanese government in January that the economy is "steadily recovering."

Especially noteworthy, Sasaki told the audience, is the apparent rebound in personal consumption.

"After a long economic slump, the man of the house has finally got his hands on some disposable income," Sasaki said as he explained how sales of men's apparel, which tends to lag behind those for women and children, are picking up.

Brisk sales of various new digital products -- flat-panel display TVs, DVD recorders, high-resolution digital cameras -- are leading the rise in consumer spending, and domestic manufacturing of these products with leading-edge technologies is in turn fueling semiconductor demand, Sasaki observed.

The pessimistic side

Ron Dore, senior research fellow at London School of Economics, gave a more reserved assessment.

True, he said, newspaper headlines suggest prevailing optimism. Instead of repeating the dire condition of weaker banks and looming bad loans, the media increasingly report on rising corporate profits, falling bankruptcies, new entrepreneurial firms preparing to list on the stock exchange, and so forth.

"Ginza and the dazzling new shopping and business centers -- Roppongi Hills -- all seem evidence of an affluence and prosperity," Dore noted.

And while the surge in exports to the United States and China is mentioned as a key positive factor, this recovery, unlike the last uptrend in 2000, is also seeing a rise in corporate investment, which hopefully will ignite domestic demand across the economy. This pattern is raising expectations that "growth really would become self-sustaining," he observed.

But apart from looming concern over the yen's appreciation, "it is hard to be quite so optimistic" if one looks at the fine print in the economic reports, Dore told the participants.

Statistics show a gap in the investment boom between manufacturing and nonmanufacturing sectors. In the December "tankan" survey by the Bank of Japan, almost all of the firms reporting improvement in business prospects were large-scale manufacturers, while nonmanufacturing firms, especially smaller ones, "were as pessimistic as ever," he pointed out.

While demand is brisk for high-tech digital appliances and spending on mobile phones and Internet connections is rising 20 percent to 30 percent a year, "overall consumer expenditure is still contracting, though at a slower rate than in previous years," Dore said in citing a consumer survey report released Feb. 7.

"Looking forward, if the household income situation improved, one could expect a recovery in consumption. But there is no sign at the moment of any improvement in the employee income, and hence no obvious signs of an upturn," he quoted from the report.

"The deflation is still there. . . . The BOJ continues to be impotent," Dore said.

While everybody seems to agree that the new governor, Toshihiko Fukui, is much better than his predecessor, Masaru Hayami, "he is no nearer to finding a solution to the deflation problem," he argued.

True, Japan's monetary base increased by 20 percent last year under the quantitative easing policy continued from the days of Hayami, but only a "tiny fraction" of that improved monetary base "gets put around to stimulate the economy," he pointed out.

The movement for corporate governance reform based on an American model has resulted in a commercial law revision and changes in the structure of many corporate boards. A number of Japanese firms have cut down the size of their 30- to 40-member boards, appointed some external directors, including women, and introduced stock options, he noted.

But Dore observed there has been a "distinct falling off in the reforming zeal" since the American model was tarnished by the collapse of the Nasdaq stock market and the Enron scandal.

"Many of the changes that have taken place are cosmetic, and they make little difference to the realities of decision-making," he said.

Meanwhile, Akira Kojima, senior managing director and editor in chief of the Nihon Keizai Shimbun, attributed the improvement in the economy partly to a growing sense of crisis on the part of the private sector.

The latest uptrend -- the third since the collapse of the asset-inflated bubble boom in the early 1990s -- differs from the previous ones in that it is not supported by stimulus measures by the government, Kojima told the symposium.

The past two recovery phases depended on generous government spending packages and proved only temporary, leading to no changes in the economic structure and resulting in huge accumulation of public debts, he said.

This time, no help came from the government, and in fact it was a negative contributor because it cut back on public works spending, he added.

"So this is good for the private sector, because with negative help coming from the government, businesses finally began to have a sense of crisis," he said. "I detect more seriousness on the part of the private sector to introduce real structural reforms (of operations)."

And while some companies are seeing success in reforming their management -- like Toyota Motor Corp. and NEC -- others are not, he observed. The outcome, he said, is the widening gap between successful and less successful firms in each industrial sector.

"In the past cycles when the economy recovered, all industries tended to move similarly; stocks of all companies in the same industry moved in parallel," he observed.

Not any longer. "It's because of the difference in how much new corporate governance each company is introducing . . . and now we are seeing 'Two Japans,' " he said. "One is performing better, one is still depending on government regulations and protection that shuts out newcomers."

The urban-rural gap

The contrast between successful and less successful segments of the economy was one of the major topics of interest among participants.

Dore touched on the gap between the glittering prosperity of urban development projects like Roppongi Hills and the sluggish rural economies.

"You go to provincial towns, you get out of the station, and you walk along the main street, and you see half the shops shuttered up, and the long lines of taxi drivers who complain (about the lack of passengers)," he told the audience.

In the same context, Dore mentioned what he described as the "new class formation" in Japan.

The meritocratic education system, which has provided a high level of equal opportunity in education for two to three generations, may be crumbling, he said. As a result, the social mobility that has characterized Japan over the last century is gradually declining.

"Increasingly, the kids who get into the top universities are the children of parents who got into the top universities themselves," he said. "This is becoming a hereditary transmission of class status."

On the urban-rural gap, Kojima noted that local economies have historically depended too much on central government subsidies.

"That was only possible when we had high growth. We must change this value or culture. . . . This process of just collecting (tax) money through the central government and distributing it (to local communities) . . . can never last," he added.

What is needed, he said, is deregulation and decentralization measures that would give freedom for local governments to compete with each other, for example, to lure foreign direct investment that currently tends to concentrate in the Tokyo metropolitan area.

Taking the long view

The panelists offered mixed views on longer-term economic prospects and growth potential. Dore said Japan's future may not be so bright even if it overcomes deflation.

"Production is being shifted out to China, and with the decline in the birthrate not only reducing the labor force but having a heavy effect on the demand side, there are plenty of reasons for pessimism about the long-term prospects for growth," he said.

What Japan needs is not pessimism, but a real sense of crisis, Kojima told the audience. "Historically, when the society had a sense of crisis, it became a strong engine for basic reforms."

For example, the aging of the population and low birthrate -- cited by Dore as one of the reasons for pessimism -- is in fact a serious problem, but it can also create new opportunities, he said.

Population aging is not unique to Japan. Indeed, it is common to all industrialized countries. But what makes Japan's case unique is the speed with which its peak will be arriving, he observed.

"We must face the very serious situation first. . . . But it is a new frontier. If we succeed (in dealing with the problem), then other countries (that will face the problem later) will follow. So you have a great chance of (creating) new frontier industries and systems," he said.

Another potential area where Japan can possibly lead the world is the environment, another source of global concern, Kojima said.

The serious air and water pollution of the 1960s prompted Japan to introduce stringent environmental regulations, which became a heavy burden on its industries but eventually made the nation into a highly environment-friendly economy, he said.

The oil crises of the 1970s triggered a sense of crisis among Japanese automakers that pushed them to create energy-efficient engines, he added. "Without that kind of sense of crisis, today's Toyota would never have existed."

NEC's Sasaki shared such a view. A simple calculation shows, he said, that Japan's energy-saving technologies, if utilized by all nations in the world, could reduce global primary energy consumption by an equivalent of 5.9 billion tons of petroleum -- roughly equal to the consumption in North America and Europe combined.

Japan will be able to make a transition to a "frontrunner economy" by utilizing its advanced technology to resolve various problems facing the international community, Sasaki said.

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