Nikkei Business. 3rd December 2004
After a couple of quarters of robust growth, the Japanese economy slowed sharply in the three months to end June. When these data were published, great confidence was expressed by interested parties, including bureaucrats and stockbrokers, that the apparent slow down was either a temporary blip or a misapprehension resulting from faulty data. We now have GDP figures for the quarter to end September. These show that the economy has slowed further since June and is now barely growing at all. It seems clear that, if we compare the earlier figures with the comments made about them, we have witnessed a case of faulty judgement rather than faulty data.
Despite the bad news, optimism about the economy remains rife. For example, Bank of Japan Governor, Toshihiko Fukui, said on 11th November that he was “certain the BOJ will not make a downward revision” when they next come to publish their views on the outlook for the economy in January 2005.
While the views of Governor Fukui reflect his assessment of economic prospects, and may therefore prove to be correct, many foreign commentators appear caught in a time warp in which the views they express seem to have been made as if oblivious to the clear message coming from recent data.
An example of this is provided by the Economist Newspaper in its 13th November edition, in which one can read that “What really turned the dollar around early this year was massive intervention by the Bank of Japan. But with Japan’s economy now in much stronger shape, it may be less eager to buy dollars.”
This is an astonishing remark in the context of the data for the past six months, which has pointed, with startling clarity, to an economy which is not stronger than it was earlier in the year but much weaker. The Ministry of Finance stopped intervening in March this year, when the economy had been growing at over 6% p.a. for the previous two quarters. Since then we have had a rash of data showing unequivocally that output has now ground to a halt.
Although short-term forecasts amount to little more than guesswork, it is nonetheless possible to make rational assessments of the medium-term economic outlook. This requires an objective consideration of the major imbalances in the economy and an analysis as to whether they can be expected to cure themselves without strain. If such good fortune cannot reasonably be expected, responsible planning requires the introduction of new policies.
Japan has several major disequilibria which need attention. The most worrying is the excessive level of corporate investment. This exposes the economy to major risks, not only because demand will fall as investment declines, but because it is ignored in the comments made by the Ministry of Finance and Bank of Japan. While the first point is worrying from a short-term viewpoint, the other is even more serious, because problems which are ignored are seldom satisfactorily resolved
Consumer spending has remained buoyant, but as incomes are falling, this has only been possible because households cut back on their savings. These have now fallen to very low levels and many economists, such as those in the OECD and in the UK’s National Institute for Economic and Social Research, expect the fall to halt or reverse.
Once again, the data showing that the economy is in bad shape may be wrong, or we may be about to witness a return to growth. But this was the consensus three months ago, and since then the data shows a worse rather than a better trend. To rely on the data being wrong again, or the economy being about to pick up, cannot therefore be other than dangerous.
Children, when they find a joke are fond of repeating it. To try and help them grow up, my wife and I used tell our children that “once is funny, twice is silly.” Those in charge of Japan’s economy would do well to heed this. It is possible that the economy will now improve without any measures to stimulate growth. But it may not, and the Japanese people have the right to know what plans are in place to avoid a fall back into recession.
Since export growth is so clearly essential, the most important issue on which the Japanese people need to be reassured is that the Ministry of Finance will return to intervening in the foreign exchange market, to ensure that the yen does not strengthen.