Japan's Economic Crisis Following the United States

Japan's Economic Crisis Following the United States terrorist attacks on September 11 and the outbreak of mad cow disease, economic analysts are predicting the onset of a deepening recession in Japan. Some are even referring to the possibility of a depression in the world's second largest economy, due to the global economic downturn.

Recently released surveys of future trends together with economic data recording economic performance over recent months point at least to the onset of Japan's fourth official recession - defined as two consecutive quarters of negative growth- in the space of a decade. Japan was last in recession in the first half of 1998 following the collapse of major financial institutions. The current downturn will be deeper, with private investment drying up amid slack global demand and bad loans weighing down the domestic economy, say analysts.

The news means the world's three biggest economies - the United States, Japan and Germany - are all now in, or on the verge of, recession for the first time since the 1970s. One important indicator of the bleak outlook for the Japanese economy was the Bank of Japan's Tankan survey.

The Tankan's quarterly diffusion index, which measures the percentage of major manufacturers reporting an expansion of business activity as opposed to the percentage that expect a decrease, fell to minus 33 for the September quarter compared to minus 16 for the previous three months. The index is now at its worst level since the April-June 1999 survey, when the figure fell to minus 37. Unemployment is at its highest level on record, and confidence is falling. Average household spending fell 0.8 percent in August, representing the fifth straight month of year-on-year declines.

Consumer prices, which have been in decline continuously for the last 23 months, were down 0.9 percent in August from a year earlier. Official unemployment has risen to 5.5 percent with predictions that it will rise shortly, the highest levels in the post-war period. Tetsuro Sugiura, chief economist for Fuji Research Institute, has predicted that unemployment will rise dramatically to the 6 percent range in coming months. Sugiura said the September 11 terrorist attacks had hurt an already ailing economy and the anticipated disposition of bank bad loans could mean more than 200,000 additional jobless.

The institute reported that the number of jobs lost through forced layoffs and bankruptcies jumped for the first time in three months, rising by 60,000 from the August figure. The Japanese Ministry of Health, Labor and Welfare announced that people claiming unemployment benefits reached a record 1.167 million in August. A report in the Japanese Times on suicide figures in 2000 revealed an increasing number of people committing suicide because of economic reasons such as debt and unemployment.

Although the number of suicides in Japan in 2000 actually fell 3.3 percent to 31,957, the level has been over 30,000 for the third straight year. The report noted that the number of suicides by people who lost their jobs increased by 139 from the previous year to 1,335, while the number of self employed workers taking their own lives rose 86 to 4,366. Experts warn that the number of suicides in this category could increase further as the nation undergoes the tough economic reforms advocated by Prime Minister Junichiro Koizumi.

The government admits these reforms will lead to more unemployment in the near term, the Times said. The job destruction is continuing as the process of corporate restructuring intensifies. The latest announcement of job cuts include: Sony Corporation, which will shed 5,000 jobs through early retirement; Komatsu, Japan's biggest construction machinery maker, will cut 2,200 jobs or 10 percent of its domestic workforce by 2004; Kobe Steel will slash its 17,600 workforce by 20 percent.

Thousands of jobs are also set to go at the Mycal supermarket chain, which recently filed for bankruptcy with almost $15 billion in debts. A less than obvious recession On many of Tokyo's streets the slowdown is almost invisible. The shops are bustling and the restaurants full. While there are unemployed people in Japan - actually more than during the time of the bubble economy - it is hard to notice them in everyday life.

Most people continue to be seen dressed well in public, though there are reports that many have switched from gourmet meals at expensive restaurants to instant noodles in the microwave. While women may be seen carrying Louis Vuitton bags around and dressed in fashionable clothes, they might use simple track suits to wear at home. There are other less noticeable signs of recession, though.

Many empty taxies can be found lining up to pick up passengers outside restaurants or train stations, unprecedented number of sale signs in upscale department stores in Ginza, rising number of discount stores and ?100 shops and less crowded bars and restaurants at dinner time. At lunch time though, the restaurants continue to be fairly crowded for two reasons: the obasans continue to socialize and salarymen have shifted business entertainment from dinner to lunch time.

While expense accounts have been considerably curtailed, companies continue to provide some degree of support to revive their businesses. Similarly, the Japanese government continues to spend enormous sums on public works project in the hope of reviving the economy. According to a recent article in Bloomberg News entitled "Think Japan's Economy is Bad Now? Just Wait," the situation will only get worse. " 'It's here where things get ugly,' " the article states. " 'As unemployment rises beyond today's record 5 percent, consumers may spend less.

If already frugal households buy less, corporate profits fall further and so do asset values. Banks, then, may be forced to let more companies fail, boosting unemployment and reducing corporate profits. And so on and so on.' " This is the very cycle Japan's policy makers have been dreading for years. To date, Tokyo has held things together with ultra-low interest rates and aggressive fiscal spending. Now that borrowing costs are at zero percent and Tokyo has papered markets with more bonds than investors can use, that's no longer possible.

Credit rating agencies are sniffing around Japan's finances, wondering if it's time for another downgrade. Faced with that darkening economic cloud and persistent problems at Japan's banks, the three main credit rating agencies recently dropped Japan's creditworthiness. Japan is now in a tie with Italy, as the least-likely major industrial nation to pay back its debts. The country's normally conservative Bank of Japan is predicting the contraction will last for two years.

Trade Minister Takeo Hiranuma raised the possibility that the economy may continue to contract in the next fiscal year - which ends in March 2003. "If the current situation continues, negative growth is inevitable (in the next fiscal year)," he said. Economists are warning that the slowdown could become a meltdown. Says James Malcolm, senior economist at JP Morgan Securities (Asia): "We're in a very bad way at the moment and things are getting worse.

Japan is no longer in recession - it's a depression." Merrill Lynch Japan chief economist Jesper Koll agrees, saying the economic outlook in Japan will get worse before it gets better. "We expect six consecutive negative quarters," he told CNN television. Koll said restructuring of the private sector and allowing companies to fall into bankruptcy was the sort of "creative destruction" that eventually would create room for profitable Japanese companies to emerge.

But he warned that the process would be long and painful, with unemployment likely to go way above 6 percent. To recover from this recession, Japan needs to increase consumer spending. Japan's companies have responded to the problems for the first time by massive layoffs and unemployment is now higher than in the United States. And prices in Japan are actually falling, encouraging consumers to delay spending in the hope that goods will get cheaper in the future.

The biggest drag on the economy is consumption, which accounts for about 60 percent of Gross Domestic Product (GDP). Despite some of the world's highest levels of savings and falling prices, consumer spending shrank by a worse-than-expected 1.7 percent. Less than four years after the last financial crisis, several banks are once again teetering on the edge of collapse, deflation has taken a grip and the government is burdened with the biggest public debt the world has ever seen.

Government economic plans It was against this background that the Koizumi government released its first proposals for reviving the economy. The reform plan was compiled by the newly created Council on Economic and Fiscal Policy. Headed by Prime Minister Junichiro Koizumi, the council includes Economics Minister Takenaka plus three other government ministers, the Governor of the Bank of Japan, Masaru Hayami, and four big business representatives.

The blueprint includes a commitment to press ahead with the removal of bad debt from the banking sector within two to three years, sweeping privatization of public enterprises, an overhaul of the social security system and taxation and major cuts to public spending. The council is scheduled to meet later this month to provide more concrete details.

The main targets of privatization include the Narita and Haneda airports, the Japan Highway Public Corporation, Japan Oil Corporation, the Urban Development Corporation, the Housing Loan Corporation (which at present controls the majority of mortgage loans) along with state run universities and postal services. The latter is a major target as it is said to control the world's largest pool of savings. Tax changes include the provision of tax breaks to business and stock market investors.

Employers are also set to benefit through plans to make job related training expenses tax deductible. The draft plan also calls for the privatization of Japan's employee pension scheme. This news will be particularly pleasing to foreign and domestic fund managers as the pension scheme, currently run by the government and backed by Japanese banks, is said to hold one of the biggest pool of pension assets in the world, according to a recent report in the Financial Times.

In the words of one United States fund manager cited in the report: " 'What companies are competing for is probably the biggest honey pot in the world.' " The draft plan also calls for the cutting of subsidies to local government which provide infrastructure and social services and the reallocation of tax revenues collected from automobile weight taxes, road tolls and petrol excises. These taxes will be used in general spending and not solely on road construction.

This measure will bring furious opposition from construction companies, many of which have close connections to the ruling LDP and have reaped large profits from construction programs. The moves for restructuring of the banking system, the privatization of the public sector, economic deregulation and cuts to government spending have drawn praise from the representatives of international capital. However, they are also stepping up the pressure to ensure that Koizumi's words are matched by deeds.

United States Federal Reserve Board chairman Alan Greenspan has insisted that the disposal of bad loans is indispensable for the reconstruction of the Japanese economy. International Monetary Fund managing director Horst Koehler praised Koizumi's efforts to rehabilitate Japan's economy through structural reforms and emphasised likewise that resolving the bad debt problem in the banking sector was the Japanese government's number one priority. While drawing praise from international financial circles, the draft plan, if implemented, will mean an economic and social catastrophe for millions of Japanese people.

According to research carried out by the Nippon Life Insurance and Dai-Ichi Mutual Life Insurance companies, if the banking sector is forced to write off the almost 13 trillion yen ($US 109 billion) in bad debts it could throw as many as 1.1 million people out of work.

This figure does not include the tens of thousands of jobs that would be destroyed as a result of corporate restructuring (the auto industry is an indicator of the extent of job losses that could take place), privatization of the public sector and those jobs that would be destroyed as a result of government spending cuts. The draft economic plan calls for the creation of five million new jobs but gives no specifics.

The figure of five million is more than anything else an estimate of the number of jobs that the Council on Economic and Fiscal Policy thinks will be destroyed. The economic research firm Teikoku Databank believes that rather than fixing the economy, Koizumi's reforms will worsen economic conditions.

Its recently released report entitled "Bad Timing For Painful Reform" stated: " 'Prime Minister Koizumi's 'No Pain, No Gain' approach to mending the economy will accomplish little more than a surge in bankruptcies and unemployment.' " 'The pledge to go through with final disposal of banks' bad loans (within two to three years) has the very worst timing.

when the economy is headed for a downturn and at the same time that financial and fiscal policies can do little to help recovery.' " It warned that small to medium companies, which employ the largest proportion of the Japanese workforce, would be the most likely to suffer. Acute conflict of interest between banks and their borrowers will interrupt efforts to put weak firms back on their feet and increase the possibility of large scale bankruptcies, it said.

These warnings have been underscored by the latest GDP figures which point to further contraction of the economy in the coming months. The Japanese government seems to be running out of policy options, with interest rates already at near zero for the past year, and a series of economic stimulus packages which have failed to boost the economy.

Indeed, although Prime Minister Junichiro Koizumi remains popular with the public, analysts and economists are worried that his plans for reform - however good they look on paper - will never make it to reality. Despite the slumping economy, Koizumi's popularity ratings are unexpectedly high. That high level of support will be vital if he is to succeed. His critics, including some members of his own party, question whether Koizumi can push reforms at a time Japan's economy may need government support, to avoid a brutal downward spiral.

Inside the ruling LDP, lawmakers are calling for the prime minister to shift his focus from reform to boosting the economy with more public spending. Koizumi acknowledged that the new GDP figures were bad but he refused to change policy. Koizumi's far-reaching economic restructuring plan hopes to make deep inroads into the living standards of working people. The decision was made on the eve of his first visit to the United States where the Bush administration has been pressing for Japan to push ahead with market reforms.

One of the plans main architects was Finance Minister Masajuro Shiokawa, one of Koizumi's most trusted advisers. In a recent interview he commented: " 'Our agenda can be compared to what Margaret Thatcher did in the 1980s in Britain. People say she cured the British disease. I hope to cure Japan's sickness.' " Trade conflict with China Falling growth and exports in Japan are fueling trade tensions, particularly with China.

Japanese producers are demanding greater tariff protection for the weakest and most regulated sectors of the economy, such as agriculture and textiles. In late April, prior to Koizumi's inauguration, the LDP government raised tariffs on the import of leeks, shiitake mushrooms, spring onions and straw for tatami mats. The Chinese government retaliated by imposing 100 percent tariffs on the import of automobiles, mobile phones and air conditioners from Japan.

China, which is seeking membership to the World Trade Organization (WTO), has stated that Japan's actions contravene WTO rules because the tariffs selectively penalize products mainly imported from China. Talks between trade officials of the two countries are planned but there appears to be little sign of a resolution. Japanese Trade Minister Takeo Hiranuma warned that Tokyo would not back down insisting that the Japanese tariffs were within WTO rules. China is about to join the WTO and Japan supported that.

If it is joining the WTO it should follow WTO rules, he said. Trade between China and Japan has risen rapidly to reach $85.73 billion last year and, according to the Japan External Trade Organization, is expected to go over $100 billion this year. Japan last year had a huge deficit of nearly $25 billion with China. In part the rise of Chinese exports to Japan is fueled by growing Japanese investment in China. As Business Week commented: " 'The irony of the trade flap is that most cheap.