Friday, Oct 24, 2003
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AFTER 12 YEARS of economic stagnation, Japan is showing signs of coming out of its slump. During the first six months of 2003, the economy has grown, in real terms, at an annualised rate of 3.9 per cent. This is higher than the GDP growth of either the United States or the European Union. A number of other indicators suggest that Japan is on the upturn. The unemployment rate has fallen to 5 per cent, still high by traditional Japanese standards but the lowest in two years. The Nikkei stock market index has increased by more than 35 per cent since April and the business confidence index is at its highest in three years. However, there have been so many false dawns during the past few years that an element of cautious optimism must mark any assessment of Japanese economic prospects. Yet with Junichiro Koizumi set to return to power in next month's elections with a fresh mandate for an economic revival programme, there is substantial reason for hope.
There are three major challenges that remain to be addressed before Japan can be confident the slump that began when the financial bubble burst in 1990 has ended. The first is the economy's continued dependence on the engine of exports. Japan's current phase of faster growth is being driven by exports, but this is not a feasible long-term strategy for a mature economy. Japan is already feeling the heat from the U.S., which is pressing for an appreciation of the yen against the dollar. A more expensive yen is sure to hit exports and stifle the economic recovery. This is something Japan would not have forgotten from its experience in the mid-1980s. The Plaza accord of 1985 began a process of a gradual appreciation of the yen. This eventually brought about a slowdown of growth in the real economy. The second challenge is deflation. Prices continue to fall, currently at an annual rate of 2.5 per cent. This explains why retail sales in particular and domestic demand in general remain flat. Domestic demand can replace exports as the main source of growth only if deflation is beaten back. Unfortunately, while a considerable amount of monetary liquidity has been pumped into the economy, this has not had the desired effect because there is a lack of coordination between the Government and the Bank of Japan, the central bank, on how to fight deflation.
The third challenge is dealing with the burden of bad debts Japanese banks are now carrying. It is estimated that non-performing assets add up to $1.2 trillion, a burden on the banks that becomes heavier every year with the continued hesitation to allow corporate bankruptcies. For years, there has been a damaging unwillingness to help banks clean up their portfolios. But the recent case of a substantial capital infusion into the country's fifth largest bank may be an indication of a new willingness on the part of the Government and the central bank to put ailing banks on their feet once again. If Japan were able to deal resolutely with all the major problems that have held it down, the benefits would extend far beyond its shores. A more rapid growth of the world's second largest economy would reduce the global economy's dependence on U.S. growth. For the economies of Asia, this would provide the opportunity of further strengthening economic links within the region and becoming less dependent on links with the E.U. and the U.S.
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