The Japanese Experience

In the last issue of the Pulse, we investigated the process of recycling income into consumption and investment. We concluded that the present economic downturn is due to a dearth of new opportunities for profitable investment. In virtually every activity we already have more than sufficient capacity to meet foreseeable needs. The technology sector that soaked up investment in the nineties reached a plateau much sooner than anyone expected, and the wild speculation that had taken place ended in huge losses. With no alternative options in sight, investment returns have dwindled to lifetime lows. The recycling process into investment, consequently, is providing little stimulus to economic activity. Overall, economic activity is still at a high level but is only sustained by extraordinary incentives such as refunds on new car purchases and no-down-payment programs for new home purchases. Without significant new growth, the financial underpinning of the economy becomes ever more fragile as unemployment grows and debt becomes ever more burdensome.

Prologue - 1989
"For the Japanese economy 1989 was a year of solid achievement. Overall economic growth, although somewhat slower than the exception- ally rapid progress recorded in the preceding year, was well above official expectations. Investment in manufacturing was maintained at a high level; consumption remained buoyant, and the large external payments surplus showed a small decline.
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"As in previous years, the mainstays of economic expansion were investment and private consumption, which collectively accounted for some 80% of GDP. ---- it was estimated that the full year saw a gain in consumer expenditure of around 4.5%, only half a percentage point below the increase recorded in 1988. This was principally the result of the continued rise in disposable income and strong underlying consumer confidence. ----average earnings were estimated to have risen by around 6%, up from 4.5% in 1988. Thus there was a good increase in disposable income.
"The buoyancy of private demand had a beneficial effect on industrial output and investment. Industrial production during the first nine months of the year rose by some 6% compared with a gain of 9.5% for the whole of 1988. [There was] a 4% rise in the capacity utilization ratio to its highest level in more than 10 years. ---All in all the year appeared to be heading for a gain in private plant and equipment investments of some 14%, compared with 16% in 1988.
Transition 1990-91 "The Japanese economy did well in 1990. GNP saw good growth for the fifth successive year and beat the gain achieved in 1989, with most domestic sectors of economic activity recording an advance.
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"The year's good all-around economic performance was the more impressive in that it was secured against a major collapse in equity prices, particularly in April and again in October, as well as a major hike in oil prices consequent on the Gulf crisis. Contrary to some fears, the sharp decline of the stock market failed to shake business confidence partly because of some timely government measures and partly because of the underlying strength of the Japanese economy.
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"As in 1989, 1990 saw a relative strengthening of domestic versus overseas demand as the engine of economic growth. Plant and equipment investments and consumer expenditure were particularly buoyant.
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"Given the relative buoyancy of domestic economic activity, ----the Bank of Japan [raised] its discount rate by one percentage point at the end of March and a further 0.75 point on August 30. This brought the rate to a relatively high level of 6% compared with 2.5% in March 1989.
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"The Japanese economy produced a satisfactory performance during 1991, although the level of business activity was less buoyant than in the previous year.
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"On the basis of economic indicators available in December 1991, it seemed that GNP for the year advanced by around 4.5% compared with an increase of 5.6% during the preceding year. This was a highly respectable performance by both Japanese and international standards - it was only marginally down from the average annual gain chalked up in the previous five years and was massively above the estimated average GDP gain for the OECD of around 1.3% in 1991.
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"Throughout the first half of the year, the authorities maintained the modestly restrictive monetary policies instituted in 1990 in an attempt to take some heat out of demand. By the second quarter of the year, the success of this policy was evident in terms of both growth and inflation indicators. In fact, because growth fell away unexpectedly rapidly, the Bank of Japan felt it expedient to cut its discount rate by half a percentage point to 5.5% in July ----the central bank ----announced a further reduction in the discount rate to 5% in mid-November. "The easing of domestic demand in Japan, particularly for capital goods, had a marked effect on industrial output and construction during 1991. The underlying trend of the industrial output was flat in the first quarter, followed by a gentle decline in subsequent months. -----the output of investment-related products was particularly weak.
Downturn: 1992 - 93
"It (1992) was a disappointing year for the Japanese economy. Although the government pursued reasonably growth oriented policies, there was a severe slowdown in most areas of business activity compared with the preceding year. One of the main reasons for this was a significant loss of confidence among both consumers and corporations arising out of a structural readjustment of real estate and equity values. Stock prices rose rapidly in the four years to 1990 greatly outperforming other major stock markets and giving rise to unsustainable price-to-earnings ratios. This gave rise to a strong downward correction in 1990, but instead of the widely expected sharp but short adjustment, prices continued to plummet throughout 1991 and most of 1992. -----Real-estate prices which rocketed in the mid 1980s also fell back rapidly, and since property companies and developers relied extremely heavily on bank finance, the slump in the market resulted in a massive rise in bad debts, forcing banks to adopt a much more restrictive approach to lending.
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"-----The Bank of Japan reduced its discount rate from 4.5 to 3.75% in April and to 3.5% in July. -----Consumer's expenditure was also affected by the virtual saturation of the market for certain products such as automobiles and consumer electronics.
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"-----Faced with this (deteriorating) prospect, the government announced an unexpectedly large $85 billion demand-boosting package in August. According to established practice, approximately 60% of the $85 billion boost was for additional public works projects. A further 20% was earmarked for housing loans and land purchases in an attempt to stimulate the real-estate market, while the remaining 20% went to financial institutions for nonhousing lending purposes. The authorities also announced the allocation of an extra $8.5 billion to be devoted to equity purchases by public bodies in the hope that this would underpin stock market prices. Further measures included changes to tax and other regulations with a view to making it easier for banks to write off bad debts arising out of the collapse in property values.
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"Hopes for an upturn in the Japanese economy [in 1992] which had declined for nearly two years were short-lived. Despite stimulatory measures introduced by the government in 1992 and again in April 1993, economic recovery stalled. A rapid rise in the value of the yen, combined with an exceptionally wet and cool summer, pushed the economy back onto a downward track. Continuing adjustment by the corporate and finance sectors (and to a lesser extent by households) to the sharp fall in stock prices and real estate prices that had occurred in 1991 and 1992 was also a drag on the economy. The net effect of this adjustment process was reduced willingness by corporations to invest and greater caution by financial institutions in lending, particularly for high-risk projects. It also reduced consumer's propensity to spend.
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" ----- The new government of Morihiro Hosokawa ----introduced a new packet of stimulation measures in mid-September. The Bank of Japan quickly cut its discount rate by 0.75% to 1.75 - a larger than expected cut - to curb the strength of the yen and improve confidence. ----- Since April 1992 four packages of stimulatory measures had been introduced, some spending had been brought forward into the first half of the fiscal year, and various new public works projects had been planned. A 13.2 trillion yen package was announced in April 1993 - the largest ever introduced by a Japanese government. In addition to government spending on infrastructure projects, easier loan conditions were introduced to promote investment, together with training programs and measures to support imports and the stock market. As these proved ineffective in stimulating the economy, a further 6 trillion yen package was announced in mid-September.
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"Despite these repeated measures, which in normal times would have sparked an economic growth, most components of demand remained weak."
Malaise: 1994 - 2002

The first quarter brought little to cheer about in the world economy. Four economies experienced lower growth in the latest 12 months than in 2002, with Britain showing a small increase. But Britain was also the only one of the five to register a fall in industrial production. Retail sales showed no growth in Germany and Japan and a declining trend in Britain and the U.S. Canada's rise was from a very low base in 2002.

Real GDP grew 1.4 percent in the first quarter of 2003, virtually the same as in the fourth quarter of 2002. The strongest contributor to growth was personal consumption expenditures, mainly for nondurable goods. Private investment's contribution was negative, despite continuing strength in the residential sector.

National income has now risen for six consecutive quarters and the first quarter increase was fairly strong. Per capita income growth was similar while real weekly earnings changed little.

The trade balance on goods and services again deteriorated in the first quarter to an annual pace of -$486 billion. Exports of goods rose slightly from the fourth quarter while imports fell. Imports and exports both decreased, but the decrease in imports was considerably larger than that in exports.

Copyright © Andrew Caughey, 2003

The Pulse of Capitalism is published quarterly. Comments may be sent to Pulse Publication, P.O. Box 140, Gibsonia, PA 15044. Telephone: (724) 443-2396
Material may be reprinted with acknowledgement of the source. Economic statistics are revised routinely and may, therefore, differ from one report to another.

Published August 2003