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Can Private Consumption Sustain the Recovery?

September 5, 2000
For the first time in three years the Japanese economy has stepped back onto the growth path. Inflation-adjusted real-term gross domestic product rose by 0.5% in fiscal 1999 (April 1999 to March 2000) after two years of decline. It was a burst of speed from January to March 2000, when growth came in at a sizzling 10% in annual terms, that produced the positive figure. With corporate profitability recovering and the information-technology revolution continuing, plant and equipment investment has apparently bottomed out. Consumer spending is also looking up

Reviewing the latest data, the Economic Planning Agency determined that "the trough of the cycle was in April 1999." In its Monthly Economic Report for June it reported, "Movement toward an autonomous recovery of the Japanese economy is gradually building." Based on this view, the government judged that the economic outlook had improved. But there are causes of concern, such as that consumer spending may be hobbled by corporate restructuring and that the U.S. economy may lose steam.

Companies and Consumers End a Two-Year Slump
The quarterly real-term GDP performance has been quite volatile for more than a year. In 1999 two quarters of expansion were followed by two quarters of contraction. It was the effects of government policies, notably public works spending, that fueled the economy in the first half of 1999, and when these effects tapered off in the second half, negative growth set in. The year 2000 has also started with strong growth, but this time investments by companies and purchases by families have set the pace. It would appear that private-sector demand is moving into the driver's seat.

Actually, plant and equipment investment for fiscal 1999 contracted by 2.5% overall, marking the second straight year of negative growth. Still, this was a smaller drop than the 6.1% decline the government had forecast, and year-on-year growth turned positive in the last two quarters of fiscal 1999, indicating that the recovery was going faster than had been expected. Evidence of the uplift provided by the IT revolution can be seen in the especially brisk sales of semiconductors, liquid-crystal displays, and other such items.

Private consumption, which accounts for about 60% of GDP, registered an increase in fiscal 1999 for the second straight year, this time by 1.2%. The January-March quarter saw growth for the first time in three years, coming in at 1.8% over the previous quarter. Because 2000 is a leap year, though, this figure slightly exaggerates the strength of recent consumption. The question now is the extent to which stepped-up production and improved corporate profits will translate into higher wages.

Decisive Moment for Self-Sustaining Expansion
On July 4 the Bank of Japan released the findings of its June Tankan, the quarterly survey of short-term business confidence. Big manufacturers were found to have a more positive outlook according to the Diffusion Index, a trend that has been continuing for six quarters.

Evidence of an economic upturn is gradually accumulating, but the road ahead is by no means clear of obstacles. There are signs that the better times in the corporate sector are brightening the household sector, such as a small degree of growth in income--a key determinant of consumer spending--resulting from more overtime work. But the summer bonuses paid by businesses are not expected to show much of a rise, and since public-sector workers are to receive smaller bonuses than they did last year, families as a whole will continue to budget their money carefully. When companies start making more money, moreover, they generally do not immediately hike wages and hire more workers. It may take some time for consumer spending to be affected.

There is concern about a mismatch in timing between receding government spending and rising private demand. There is also the worry that if a supplementary budget proves necessary, the government debt incurred to finance it may push up long-term interest rates. Another question is whether housing investment will sag if some of the preferential tax measures propping it up are removed. Also uncertain is the outlook for the U.S. economy. Rising American interest rates seem to be taking some of the steam out of the U.S. expansion, and Japanese exports to the United States will taper off as the overheating in demand cools down. The worst-case scenario would be a crash in the U.S. stock market, which would cause turmoil in financial markets around the world and knock the Japanese economy off its feet.

The day of reckoning is drawing near for the Japanese economy: Will the green shoots that have appeared recently bloom into a self-sustaining expansion?.

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Trends in JapanCopyright (c) 2000 Japan Information Network. Edited by Japan Echo Inc. based on domestic Japanese news sources. Articles presented here are offered for reference purposes and do not necessarily represent the policy or views of the Japanese Government.