Pacific Perspective
Pacific Perspective
Is Japan’s glass
half full or half empty?Last week, Japan's latest index of leading economic indicators (the kind that are intended to forecast future economic activity) showed its seventh consecutive monthly increase. At roughly the same time, Japan's stock markets, as measured by the Nikkei 225 index, reached an 19-year low. These two contrasting measures of Japan's performance show how hard it is to assess what is happening in that economy.
On the one hand, some of the news is good, or at least better than in the recent past. On the other hand, there remain deep doubts about Japan's near-term economic prospects. What gives?
Let's look at the good news first. It appears that Japan's recession of 2001-02 may be coming to an end. Earlier this year, when the yen to dollar exchange rate was hovering near a weak 130, resurgent exports contributed to a firming of Japan's economy. Since then, the yen has rebounded (to about 122 per dollar), but some optimism still exists. The leading indicators point to continued strength in labor productivity, hours worked, operating profits, new orders, and business perceptions of their conditions. The Organization for Economic Cooperation and Development (OECD) is forecasting that 2003 will show modest (0.25 percent) real growth of Japan's GDP.
However, even those who are somewhat optimistic about Japan's recovery are hedging their bets, and therein lies the rub. For example, the OECD states that Japan must "resolve bad loans held by banks" and contain the "risks to the financial system" that such bad loans present. Further, they argue that "planned structural reforms should be implemented without delay."
Many observers of and participants in Japan's economy are pessimistic that these required changes will take place. For example, in April the international financial rating services Moody's and Standard & Poor's both downgraded the quality of Japanese government bonds. They cited concerns over the country's mounting government debt (130 percent of GDP versus 57 percent for the United States) and the Koizumi government's apparent inability to push structural reforms through the Diet toward implementation. The Japanese stock market seems to share in this pessimism. Investors are necessarily forward looking, and Japanese investors don't seem convinced that the corner has been turned on the economy.
The lack of investor confidence has created it own negative effects. When the Nikkei fell to its recent lows, holders of Japanese stocks, including banks and insurance companies, saw the values of their assets dwindle, exposing them to increased risk of failure.
The Japanese government has spent years trying to engineer a sustainable rebound. It has used deficit spending with little lasting effect other than reaching the levels of public debt noted above. It has used monetary policy to drive interest rates to near zero percent, all to little avail.
Restructuring and reform are all that is left. If some progress can be made in that arena then the glass that is Japan's economy may be viewed more as half full rather than half empty. Perhaps then, a lasting turn-around can be achieved.
Jack P. Suyderhoud is a professor of business economics at the University of Hawaii College of Business Administration. Reach him at www.cba.hawaii.edu/suyder.