Japan breaking out of economic slump
Eight years of deflation are expected to end in 2006, boosting consumer spending.
TOKYO — Christmas came a few days early in Japan when the government announced Monday that the economy was likely to emerge in 2006 from eight years of price deflation.
The stock market obligingly powered to a new five-year high, briefly topping 16,000 points on Wednesday, underscoring that many feel the nation's long economic slump is ending.
Declining consumer prices in Japan have wreaked havoc on the world's second-largest economy by encouraging shoppers to delay purchases of everything from refrigerators to houses. With consumption accounting for about 55 percent of GDP, the disincentive to spend has caused a decade-long vicious cycle of falling corporate profits, departure of producer capacity overseas, downward pressure on incomes, and scores of bankruptcies.
But the foundations of a consumer-spending turnaround were laid when wage deflation came to an end some time last year, partly as a result of improvements in the job market, says economic analyst Naoko Yano at Mitsubishi Research Institute. "As stronger corporate profits begin to filter more fully into pay packets, both higher incomes and better sentiment toward the economy is likely to help further boost individual consumption," she says.
To be sure, the chiefs at the Ministry of Finance expect the transition from deflation to inflation to be fragile at first. The report released Monday predicts consumer prices will rise a mere a 0.5 percent next year. But economists see positive signs, at least until the end of the decade, as asset-rich baby-boomers retire and divest their savings into the economy at large, and their children move into higher-paid jobs and buy property.
A surge in property investment is already under way in major urban areas. While land prices nationwide plunged 67 percent over the past 14 years, property values in central Tokyo rose 0.5 percent this year for the first time since 1991. Areas of Osaka and Nagoya also posted gains.
Foreign investors have been quick to jump on this trend, snapping up idle golf facilities, suburban malls, and tony apartment complexes.
Real estate investment trusts have become popular with individual and corporate investors, helping fuel redevelopment of many business districts. Areas like those near Tokyo Station are almost unrecognizable from even five years ago as skyscrapers replace drab office space dating from Japan's postwar building boom. Research firm IDSS Co. expects office rents in central Tokyo to rise in 2007 for the first time in 15 years.
Foreigners have also been a key factor in rising stock prices. Despite new highs this week, many analysts expect the pace of gains to slow, as overseas markets have been left in the dust by the blistering pace. The Nikkei has gained more than 30 percent from the beginning of 2005 compared with around 2 percent for the Dow Jones Industrial Average, 15 percent for the FTSE index in Britain, and 20 percent for the DAX in Germany.
Still, there are few concerns over the economy itself. Unrecoverable loans have been written off, and corporations that had been burdened for years with massive repayments on bad investments now have increasing leeway to plow some profits back into infrastructure and research. Indeed, the recovery is expected to spread beyond the corporate sector as companies become more willing to accept wage rises.
Manufacturers of such items as digital cameras and flat-panel TVs led the upturn early by posting strong profits, but evidence is growing of the strength of non-manufacturers, says Tatsuya Torikoshi, an analyst at Daiwa Institute of Research.
"Activity is strong in such industries as retailing, the hotel and restaurant businesses, finance/insurance, and real estate - these are industries that are only weakly related to industrial production," he says. A major factor is household expenditures as well as the fact that firms are no longer procuring profits from wage cuts, he says. Companies are also more willing to employ full-time workers over part-timers, he adds.
The result is that wages in Japan should now begin to rise in line with GDP growth. The official prediction for GDP next fiscal year is 1.9 percent growth, but private-sector economists say this figure is conservative.
Yuji Shimanaka, an analyst at the UFJ Institute, expects private consumption to help push GDP growth to as high as 2.7 percent. "The adjustment in excess inventories is over, expectations for information technology-related demand and a speed up in overseas economies are strong, the environment surrounding construction investment is improving, and more companies are reinvesting profits in their own business - I expect the pace of expansion to accelerate early next year."
Despite such optimism, growth of 2 to 3 percent is far below the 7 to 9 percent levels seen in China and India. Even so, the sheer size of Japan's economy means that modest growth will have a ripple effect on the world economy which has been overly reliant on the US. As if to emphasize the point, Toyota Motor Corp. announced Tuesday that it aims to make 2006 the year in which it overtakes General Motors Corp. to become the world's No. 1 auto producer.
A key factor in the economic upturn is said to be the Bank of Japan's unorthodox monetary policy. The central bank has kept the interbank market awash with cash offered at near-zero percent interest rates in a bid to ensure that smaller manufacturers didn't fall victim to private banks' efforts to clean up their bad loans and rein in lending.
Mr. Shimanaka says once the BOJ returns to a more orthodox policy next year and mild inflation takes hold, the economy is likely to enter a virtuous cycle of growth reminiscent of the period of 1965-1970. Some, such as chief economist Jesper Koll at Merrill Lynch, see such a rosy period lasting up to 10 years.
While that may sound too good to be true, Japan lost 800 trillion yen ($6.84 trillion), or more than 18 months of GDP, as a measure of national wealth, from 1990 to 2004. An estimate by Mizuho Securities Co. shows that the total value of public and private assets in Japan will rise 10 trillion yen ($85.46 billion) this year, but that still leaves plenty of catching up to do.