OPINION: Japan hoping history does not repeat

Japan’s economy is growing again. But doubts linger about the sustainability of the upturn, given the persistence of Japan’s structural problems.

Japanese economic growth is likely to be 3.5-4.0% this year, the strongest since 1995-96. Not coincidentally, the last time Japan’s economy was this strong was also the last time that the world saw synchronized growth. The period between those two synchronized expansions was riddled by crises, including the Asian crisis of 1997-98, which slammed many of Japan’s trading partners.

Japan’s economy moved out of recession in the first quarter of 2002, and has been gradually building momentum since then. Most of the initial impetus for growth has come from outside. The latest data show Japanese exports rising at a 13% rate compared to a year ago, with strong growth to such countries as China, Korea, Taiwan, Thailand, India, Vietnam, Australia, New Zealand and even Russia. This increased demand is now spreading to the rest of the economy.

Some commentators have questioned the sustainability of Japan’s economic growth, given its apparent heavy reliance on increased exports. But with imports growing at a high rate also most recently around 10%, much faster than domestic consumption growth it is clear that something deeper is going on. Indeed, Japanese companies have been rationalizing their production processes, boosting productivity and profitability through aggressive offshoring. The result has been an increase in the importance of two-way trade to the Japanese economy, with total trade as a share of GDP rising from 20% to nearly 23% in five years. Japan is incorporating other Asian suppliers into their supply chains, and selling a lot of machinery, equipment and expertise abroad.

Meanwhile, domestic investment indicators are beginning to show considerable strength, with growth in business spending likely to exceed 7% in 2004. The improved performance of companies has reduced the bankruptcy rate although it remains high by historical standards, given widespread corporate restructuring and this increase in job security will gradually add to consumer confidence. When that happens, the expansion will truly find its legs. Growth will moderate a little next year, along with the rest of the world, but the expansion will continue.

The biggest fly in the ointment is the tenuous fiscal situation. The government has been hitting the economy with aggressive fiscal spending for more than a decade, and debt now exceeds 150 percent of GDP. Many commentators are now calling on the Japanese government to act quickly to fix its finances, given that growth has re-emerged. But that is the mistake they made in 1996 just as the economy began to recover, they boosted consumption taxes and the economy faltered badly, just in time for it to be slammed by the Asian crisis. Expect more caution this time.
The bottom line? The Japanese economy was the envy of the world 15 years ago, and it got there on the strength of its fine global companies. Those companies are still among the best there is, and they are 15 years the wiser. Chances are this recovery will have staying power.

Stephen S. Poloz is Senior Vice-President and Chief Economist with Export Development Canada. He can be contacted at spoloz@edc.ca