Japan’s Economy: From Bubble to Bust
Congressional Research Service: Report for Congress, 94-226E
-ti- Japan’s Economy: From Bubble to Bust
March 8, 1994
By James K. Jackson
Specialist in International Trade and Finance
Economics Division
This Report is 5357 words long
Source: http://digital.library.unt.edu/govdocs/crs/permalink/meta-crs-104
Summary
In the 1980s, Japan’s economy posted strong economic growth, instark contrast to the more pedestrian growth other developedeconomies experienced. In this period, referred to as the “bubble”economy, Japan experienced a sharp increase in the values of landand stocks. The fast paced growth came to a halt in 1991, however,as the Ministry of Finance grew concerned over prospects of arising rate of inflation, and, accordingly, tightened the nation’smoney supply. Since then, Japanese economic growth has fallensharply and the economy has experienced asset deflation, risinglevels of unemployment, and falling corporate profits andinvestments.
For the United States, the speed and timing of Japan’s economicrecovery could affect the strength of economic expansion in theUnited States in 1994 and 1995. If the Japanese economy recoverstoo quickly, capital markets likely will tighten and interest ratesrise in Japan and in the United States, dampening the U.S.recovery. More plausible, however, is that Japan’s economicrecovery will be tepid and add little to economic growth in theregion and in the United States. The Clinton Administration isencouraging Japan to adopt a more vigorous package of stimulativemeasures than it has proposed so far. As long as the two economiesare out of sync, with the U.S. economy growing quickly and theJapanese economy lumbering in recession, the bilateral merchandisetrade account likely will continue to post large deficits for theUnited States.
Most economists believe the Japanese economy is fundamentally soundand that it will recover from its current recession. The economy,however, appears more vulnerable than it did in the 1980s, whensome observers viewed it as a behemoth set to conquer othereconomies around the globe. Successive Japanese governments haveproduced five economic packages since 1992, the latest in February1994, to stimulate the economy, so far with little visible success.The Hosokawa government, preoccupied with political issues, delayedadopting its widely expected cut in taxes to boost the economy. Theeconomic stimulus package announced February 1994, just prior tothe scheduled Clinton-Hosokawa summit, is not expected to give theJapanese economy much of a boost, but may prevent it from slidingfurther until recovery can begin in late 1994 or 1995.
Opinions differ over how the current recession is affecting Japan’seconomy. Some economists believe the Japanese economy is goingthrough the same kind of the U.S. economy experienced in the 1980s,but that by the mid-1990s its economy will be well-positioned foranother burst of fast-paced growth. Others believe the cyclicalcontraction is having a structural impact on their economy thatwill remain long after their economy recovers because thestructural changes are altering elements of the economy that havecharacterized Japan’s post-war growth.
Japan’s Economy: From Bubble to Bust
Japan’s “bubble economy”–the period in the late 1980scharacterized by a sharp increase in the rate of economic growthand the pace of business investment spending–screeched to a haltin 1991. This shift from boom to bust was triggered by Japan’sMinistry of Finance (MOF), which put the high-flying economy on amonetary diet to stem inflation. As a result of the Ministry’smeasures, business investment and consumer spending plummeted,sapping the economy of the two most important domestic sources ofgrowth.
The Ministry’s actions worked all too well. In fact, since 1991 thegovernment has adopted a series of monetary and fiscal policymeasures to prop up the economy, so far with no visible success.Most economists, however, believe the economy remains fundamentallysound and that it should recover in 1994 or 1995. Still, opinionsdiffer over how extensively the cyclical contraction is affectingthe economy. Some economists believe the recession is a necessarycorrection to the fast-paced growth the Japanese economyexperienced in the 1980s, that it will have only a short-termimpact on the economy’s long-term rate of growth, and that by themid-1990s the Japanese economy will be well-positioned for anotherburst of rapid growth. Others believe the cyclical recession willhave a lasting effect on the economy because it is alteringstructural elements–such as lifetime employment–that havecharacterized the post-war economy. The recession also may mark theend of the high rates of economic growth Japan experienced duringthe 1960s, 1970s, and 1980s.
BACKGROUND
Japan’s economy fell into a recession in 1991. That much is clear.What is not clear is when the recession will end, how strongeconomic growth will be after recovery begins, and what long-termimpact this recession is having on the economy. Some economistsbelieve the Japanese economic miracle has been brought to an end.They argue that the recession is quickening the pace of change inthe Japanese economy and that these changes are undermining thebasis upon which Japan’s economic miracle was established.(1)Other economists believe the economy is experiencing merely acyclical contraction that stems from the fast-paced, and ultimatelyunsustainable, growth of the 1980s. One such economist argues thatJapan,
is purging itself of the excesses of the 1980s, that iscleansing its economy, and that is melting off the fataccumulated during … years of record smashing economicexpansion. All this is positive. By the mid-1990s, once theeconomy is brought down again to its rock-hard, competitivecore, Japan will be poised for another powerful leap aheadthrough to the end of the decade.(2)
This recession is notable for a number of reasons. First, therecession follows the second longest expansion in the post-warperiod and, if current predictions hold and the recession continuesthrough May 1994, it will be the longest recession the economy hasexperienced in the same post-war time frame. Second, thisrecession is the first in the post-war period that originatedprimarily from internal, rather than from external, forces.
1. The Japanese Economy: From Miracle to Mid-Life Crisis. TheEconomist, March 6, 1993. p. 3-4.
2. Courtis, Kenneth S. Japan: The Heisei Cycle. JapanClose-Up, September 1992. p. 13.
As figure 1 shows [PLEASE CONTACT GATEWAY JAPAN FOR THIS FIGURE],during the 1980s, the growth of Japan’s real gross domestic product(GDP) averaged above the 4-percent rate most economists believe theeconomy is capable of sustaining without risking a rising rate ofinflation. By 1991, Japanese firms had invested more in new plantand equipment, in absolute terms, for four consecutive years thandid U.S. firms, with about one-third of this investment goingdirectly into rationalization (eliminating redundant ornonessential activities or equipment) and productivityimprovements.(3) These investments helped sustain the economicexpansion in the 1980s, but have left many Japanese firms withexcess capacity that is now inhibiting current attempts to “rev up”the economy.
3. Courtis, Kenneth S. Japan in the 1990s. Business & TheContemporary World, Winter 1992. p. 63.
The drop in Japan’s GDP growth in 1992 and 1993 reflects primarilythe delayed effect of monetary tightening imposed by the Bank ofJapan in 1990 and the generally tight, or neutral, fiscal policyJapan has followed since the early 1980s. These policies combinedinitially to raise interest rates in Japan, which cooled businessinvestment spending and consumer spending, especially for housing.Based on latest estimates, GDP growth was negative for all of 1993,the first time since the oil price-induced recession of 1974 thatthe Japanese economy has experienced an annual negative rate ofgrowth.
THE ECONOMIC “BUBBLE”
Japan’s current economic troubles largely stem from economic andfinancial policies the government pursued in the 1980s. Inparticular, the way the Ministry of Finance (MOF) sought toliberalize the nation’s financial sector and the mix of monetaryand fiscal policies it pursued provided the catalyst for thespeculative boom of the 1980s and the slowdown of the 1990s. Afterincurring large budget deficits in the late 1970s and early 1980s,the Japanese government adopted a stringent fiscal policy toeliminate the need for issuing bonds specifically intended forfinancing its budget deficits.(4) At the same time, the MOFliberalized most capital outflows, while moving in a piecemealfashion to loosen internal controls over domestic financialmarkets.(5) This combination of policies sparked a rush of capitalout of Japan at the same time the United States adopted a mix ofmonetary and fiscal policies that worsened the Nation’ssavings-investment imbalance. The U.S. imbalance, in turn,attracted a large portion of the capital flowing out of Japan.
4. The Japanese government’s budget has a capital account thatis financed through general revenues and construction bondsgeared toward public works construction projects; the otherpart of the budget includes spending on current items and isfinanced through general revenues. The Government isprohibited by law from issuing bonds to cover current expensesunless the Diet, or Parliament, approves the issuance of such”deficit-financing” bonds.
5. For additional information, see: U.S. Library of Congress.Congressional Research Service. Japan’s FinancialLiberalization: Effects on the United States. CRS Report No.89-102 E, by James K. Jackson. Washington, 1989.
The large flow of capital from Japan to the United States pushedthe value of the dollar up nearly fifty percent between 1980 and1985. To bring the value of the dollar back down, the United Statesand Japan struck the Yen/Dollar Agreement in 1984. Then, in 1985and 1987, the United States, Japan, and West Germany, reached anumber of informal agreements to stabilize the dollar and tocoordinate economic policies. These agreements effectively sowedthe seeds for much of Japan’s speculative boom in the last half ofthe 1980s by shifting the composition of demand in the economy awayfrom net trade (exports less imports). Given Japan’s commitment toreducing its central government budget deficits, it used monetarypolicy as its main economic coordinating mechanism by increasingthe growth rate in its money supply in order to bring down domesticinterest rates and to stem yen appreciation.
Double-digit increases in the annual growth rate in Japan’s moneysupply (defined as M2+CDs) [M2 is M1 (currency in circulation +deposit money) + private deposits and public deposits less demanddeposits with financial institutions.] were the standard throughoutthe 1960s and 1970s when the Japanese economy also was growing atdouble-digit rates. Such increases, however, occurred only once inthe 1980-1987 period. Following the Louvre Accord in February 1987,Japan pushed its money growth up to double-digit rates and itsofficial discount rate down to 2.26 percent, as indicated in figure2. [PLEASE CONTACT GATEWAY JAPAN FOR THIS FIGURE] With interestrates low, the money supply growing, and financial liberalizationprogressing slowly, Japanese firms and individuals found themselveswith excess cash to spend and invest. Japanese firms used the fundsto invest in plant and equipment and to acquire foreign businessesand financial assets. Japanese firms, for instance, investedheavily in U.S. businesses and real estate during the 1980s and by1993 had displaced British firms to become the largest foreigndirect investors in the United States.(6) Individuals foundthemselves with few choices: they could either place their savingsin low-yield savings accounts with officially controlled interestrates, or they could invest in stocks and land where prices and,therefore, returns were not controlled.
6. U.S. Library of Congress. Congressional Research Service.Foreign Direct Investment in the U.S.: Japan as Number One.Report No. 93-704 E, by James K. Jackson. Washington, 1993.
What followed was a period of economic expansion and asset priceinflation that is unprecedented in modern Japanese history. Thisperiod, termed the “bubble economy,” is characterized by anincrease in the growth rate of the money supply that fueled a risein business investment spending and personal consumption. In turn,the increase in business and consumer spending ignited aspeculative boom in real estate values and in stock prices. Asfigure 3 shows [PLEASE CONTACT GATEWAY JAPAN FOR THIS FIGURE],residential land prices in Japan’s six largest cities tripledbetween 1984 and 1990. By 1989, rising real estate priceseffectively excluded a whole segment of the Japanese populationfrom buying a home and sparked concerns among some political andbusiness leaders in Japan over a growing disparity in incomebetween groups in Japan.
For anyone owning land, however, the inflated land values provedeasy to parlay into loans or into other assets, such as stocks.Between 1984 and 1989, for instance, the bellwether Nikkei index of225 selected stocks nearly quadrupled from 10,000 to nearly 40,000.This rise in stock prices inflated the value of the stocks andencouraged firms to boost their capital investments and consumersto increase their spending. Many investors, in turn, used theinflated values of their stock holdings as collateral to purchaseadditional real estate. Consequently, real estate and stock pricesfueled each other in an upward spiral.
THE END OF THE BOOM
The speculative boom and the imbalance it created in the Japaneseeconomy, was curbed in 1990 and 1991 when the Ministry of Financeslowed the growth rate in the money supply and began gradually toratchet up the official interest rate to 6.0 percent. Through 1990,GDP growth remained strong, while real estate and stock pricesnosedived in response to the monetary tightening. By the secondhalf of 1991, the MOF started easing up on the economy, apparentlyout of concern that the correction it precipitated was getting outof hand and that a series of declines in stock market prices wasdamaging the financial stability of banks and brokerages. BetweenJuly and December 1991, the Bank of Japan lowered the officialdiscount rate three times.
RESPONSE BY FIRMS
Japanese gross domestic product (GDP) data indicate that the growthrate of the Japanese economy fell sharply in 1992 to about 1.1percent, or about one-fourth of the rate in 1991. (See appendixA.) This decline in GDP growth was matched by an equally sharp dropin business investment spending. Despite rising interest ratesbetween 1989 and 1991 and a decline in the growth rate of the moneysupply, Japanese businesses continued to invest heavily through1991 in real terms, before curtailing their expenditures on newplant and equipment, as figure 4 shows [PLEASE CONTACT GATEWAYJAPAN FOR THIS FIGURE]. Production remained strong through 1991,despite rising inventories and declining profits. Since 1991, allthe major indicators of economic performance in the manufacturingsector have turned negative: production, profits and plantoperating rates have declined, while inventories have increased,causing firms to reduce their investment spending and the number ofhours their employees work.
Industries oriented toward consumer products have been especiallyhard hit during the prolonged recession by the decline in consumerspending. Two of Japan’s most renowned industries, consumerelectronics and automobiles, face severe restructuring problemsthat are spurring firms to shift parts of their production abroadand may well reduce the total number of firms in thoseindustries.(7) The appreciation of the yen in 1993 and again in1994 has compounded the problems of these and other industries thathave significant export activities. Retailers, auto dealers, andeven beer producers are attempting to coax consumers to spend byoffering deep discounts on their products, a practice that is mostuncommon in Japan. While such a tactic yields sales in the shortterm, some analysts expect that it will retard Japan’s economicrecovery because discount sales do little to enhance retailersprofits or to help them pay off debt.(8) Moreover, since wage andsalary increases are tied informally to rises in consumer prices,a deflationary movement in consumer prices likely will spur firmsto press labor unions for smaller salary increases in their annualspring negotiations, further restraining consumer spending.(9)
7. Corporate Shake-Out Around the Corner. Tokyo BusinessToday, Jan./Feb. 1993. p. 3845.
8. Oishi, Nobuyuki. Deflation Seen Sapping Potential Growth.The Nikkei Weekly, January 31, 1994. p. 3.
9. Ibid., p. 3.
Firms are responding to the recession by reducing their employmentrolls. In general, employment adjustment in Japan begins by firmsplacing restrictions on overtime hours, followed by cuts in hiring,and then cancellations of all new hiring. If adverse economicconditions persist as they have, firms follow up these moves byfiring part-time employees and seasonal workers, relocatingemployees to other firms, and finally, inducing employees to takevoluntary early retirements.(10) For instance, Japan’s TDK Corp.,the world’s largest manufacturer of magnetic tape, decided to keepabout 60 managers over the age of 60 on “standby” at home at 80percent of their salary until they reach the mandatory retirementage of 60.(11)
10. On the Corporate Dole: Japan’s One Million “WorkingUnemployed.” Tokyo Business Today, May 1993. p. 10; and Evans,Robert, Jr. The Japanese Labor Market. In: U.S. Congress.Joint Economic Committee. Japan’s Economic Challenge.Washington, U.S. Govt. Print. Off., 1990. p. 240-254.
11. Japan’s “Full Employment” Myth Bites the Dust. TokyoBusiness Today, May 1993. p. 9.
Firms take these actions in large measure because the Japanesegovernment, through the Ministry of Labor, favors labor stabilityover labor mobility and provides subsidies to firms toretain their employees.(12) While such measures may have served theJapanese economy well when it was experiencing rapid rates ofgrowth in the 1960s, 1970s, and 1980s, these policies likely makeit more difficult for Japanese firms to respond rapidly duringperiods of extended slow growth and potentially extend the lengthof a recession. In early 1994, the Labor Ministry was providingsubsidies to 4.7 million workers, or about 7 percent of Japan’swork force, in 224 designated industries. This subsidy fundspersonnel wages and other costs, including retraining andtransfers. Companies can use the subsidy program for one year andthen reapply for a second year. The Hosokawa government announcedin late December 1993 an enhanced program that pays 80 percent ofcertain staff expenses through March 1996 for workers undergoingretraining.
RESPONSE BY CONSUMERS
Personal consumption–spending by individuals–is a major componentof economic growth, but Japanese consumers are showing littlewillingness in leading the economy out of its recession. Despitethe measures taken by the Japanese government and businesses,Japan’s official unemployment rate reached 2.9(13) percent inDecember 1993. Also, the sluggish economy has caused firms toreduce the semiannual bonuses they give their employees, reducingdiscretionary spending by consumers.(14) As figure 5 [PLEASECONTACT GATEWAY JAPAN FOR THIS FIGURE] indicates, wages andsalaries have declined, and consumer spending in large retailstores, an indicator of consumer confidence and consumptionbehavior, has dropped annually since 1991. Consumers also havegrown concerned over job losses or layoffs as the number of jobsavailable to the number of those seeking jobs fell to 0.6 inDecember 1993. What this ratio means is that for every ten personsseeking employment, there were only six jobs available. This is asharp contrast from the late 19808 when the ratio was 1.4, meaningthat for every ten persons seeking jobs, there were 14 jobsavailable. In 1994, Japan’s labor unions, which traditionallyhave pushed for wages increases, are pressing instead for jobsecurity.(15)
12. Suzuki, Yasuhiro. Labor Ministry Criticized For NarrowJobs Focus. The Nikkei Weekly, January 24, 1994. p. 1.
13. According to analysts with the U.S. Department of Labor,Japan’s unemployment rate is only slightly underestimated inrelation to most U.S. concepts. These analysts attribute theunderestimation to differences in institutions, attitudes, andeconomic and social structures which tend to push Japaneseslack labor into underemployment and hidden unemployment.However, when Japan’s unemployment rate is recalculated toincorporate workers that are underutilized or discouraged(persons outside the labor force who want a job, but are notseeking one because they believe their search will be futile),Japan’s unemployment rate jumps from 2.9 percent to the rangeof 8.0 to 11.0 percent. Sorrentino, Constance. Japan’s LowUnemployment: An In-Depth Analysis. Monthly Labor Review,March, 1984. p. 18-27; Sorrentino, Constance. JapaneseUnemployment: BLS Updates Its Analysis. Monthly Labor Review,June 1987. p. 47-54; Sorrentino, Constance. InternationalComparisons of Unemployment Indicators. Monthly Labor Review,March 1993. p. 3-24.
14. Sumiya, Fumio. Year-End Bonuses Expected to Fall for 2ndStraight Year. The Nikkei Weekly, Dec. 6, 1993. p. 1.
15. Kato, Hidenaka. Job Security Moves Up on Agenda. TheNikkei Weekly, January 17, 1994. p. 2.
The prolonged recession and poor retail performance are starting toaffect Japan’s retail sector in ways that may benefit Japaneseconsumers and foreigners attempting to export to Japan as theeconomy recovers. Consumers are starting to benefit from the effectan appreciating yen has on lowering prices of imported goods andfrom discount retail prices,(16) although such changes areunlikely to be a prime source of recovery. Some retailers also arestarting to offer Japanese consumers discounted prices on theirregular merchandise, and lower prices on imported goods arebeginning to filter through Japan’s tightly controlled distributionsystem. Japan’s utility companies, for instance, import most oftheir fuel and, therefore, have seen their costs fall as the yenhas appreciated. The utility companies, however, still calculatetheir energy costs at rates similar to those in 1989, when the yenwas 124 to the dollar, compared with the current rate (March 1994)of about 103. As a result, the average Tokyo household is spending$600 to $700 a month on utility charges (water, electricity, andgas).(17)
16. Japanese manufacturers are prohibited by law from imposingminimum prices for their products on wholesalers or retailers,termed resale price maintenance. Despite this prohibition,resale price maintenance is alleged to occur quite widely inJapan’s distribution system, to support prices and profits forJapanese manufacturers. See: U.S. Library of Congress.Congressional Research Service. Japan: Resale PriceMaintenance. Report No. 91-289 E, by Dick K. Nanto.Washington, 1991.
17. Thomson, Robert, and William Dawkins. A Sorry Spectacle inTokyo. The Financial Times, February 16, 1994. p. 15.
POLICY RESPONSE
In addition to measures the Ministry of Finance has taken to boostthe Japanese economy, primarily lowering interest rates, theJapanese government has adopted a number of fiscal stimuluspackages. In 1992, the ruling Liberal Democratic Party and Japan’sleading business organizations grew concerned over the course ofthe economy and fashioned two economic stimulus packages to boostthe economy. (For a detailed account of the measures the Japanesegovernment has adopted since 1991 to spark the economy, seeappendix B.) The five stimulus packages Japan has adopted since1991 rely heavily on advancing public works projects ahead ofschedule and on making low-interest rate loans available to smalland medium-size businesses to spark an economic recovery ratherthan on providing any new government spending. Indeed, criticsargue that the stimulative packages contain little, if any, realnew spending.
Also, as Japan’s Nikkei index of stock market prices tumbled belowthe 15,000 mark, the government intervened unofficially, butunmistakably, by discouraging securities firms from sellingsecurities and by prodding pension fund managers into buying stocksto shore up the stock market and to aid Japan’s banking andsecurities industries.(18) Japanese banks and securities firmsaided and actively participated in the stock and land speculationbecause it enhanced their own asset bases.
18. Estimates indicate that the government has invested atleast 8 trillion yen ($70.8 billion) in public pension andpostal life insurance funds to shore up stock market prices.Stock Slide Reflects Finance Ministry’s GrowingIneffectiveness With Business. The Nikkei Weekly, January 17,1994. p. 5.
Japanese banks and securities firms own substantial amounts of realestate and corporate stocks, which are counted as part of theirassets.(19) As stock and real estate values soared, the banks andsecurities firms also saw their assets swell in nominal value,which they then used to finance additional activities. When thevalues of real estate and securities plummeted, however, securitiesfirms and banks saw their own asset bases shrink, placing much oftheir core business activities at risk. Japanese banks werepummelled further by rising defaults on many of the large numbersof real estate loans they had made. Although accurate estimates aredifficult to obtain, some analysts estimate that Japan’s bankspresently have roughly $260-$300 billion in bad real estate debtsto work off, with more debts accruing as the recession lingers.(20)
19. Institutional ownership of corporate shares, which arerarely traded, accounts for about 65 percent of alloutstanding shares. Viner, Aron. Inside Japanese FinancialMarkets. Illinois, Dow Jones-Irwin, 1988. p. 121.
20. Japanese Banks: Tough on the Taxpayer. The Economist,February 26, 1994. p. 74-75.
As industrial production declined and businesses’ inventoriesmounted in 1993, government efforts to stimulate the economythrough public works construction projects and lower interest ratesproved ineffective. In three economic packages alone, thegovernment ostensibly pumped about $132 billion (about 3.5 percentof nominal GNP in 1992) into public works projects, but theshrinking size of the construction industry in the economy and thedearth of consumer spending weakened most of the stimulative effectof the spending.(21) Japanese banks, saddled with potentially hugelosses on real estate loans have been especially reluctant toengage in additional construction loan activities (the major thrustof all four stimulus packages). Also, the Finance Ministry haseffectively negated any fiscal stimulus by trimming down theeventual size of the stimulus package from that announced initiallyand by offsetting increased spending on construction projects withreductions in the revenue it shares with local and prefecturalgovernments.(22)
21. Shinmura, Toshio. Can Bulldozer Fix Economy’s Rough Roads?The Nikkei Weekly, January 17, 1994. p. 3.
22. VanDenBerg, Jan. Japanese Stimulus: Truth and Advertising.International Economic Insights, July-August, 1993. p. 4;Revenue sharing from the central government accounts for about40 percent of the revenues of local governments. See: Oishi,Nobuyuki. Local Budgeting Awaits Word From Tokyo. The NikkeiWeekly, January 31, 1994. p. 3.
Furthermore, the interest-sensitive sectors of the Japanese economy–business investment, mortgages, and consumer spending–arebeset by a score of problems of their own. Businesses are unlikelyto pick up spending on new plant and equipment as long as the rateat which they are utilizing their current plant capacity is low,their inventories remain high, and demand for their products isweak. Demand for mortgage funds increased during 1993, but land andhousing prices are still too high for most Japanese to afford,despite the drop in real estate prices since their peak in 1990.
During 1993, the Japanese government offered two additionalstimulus packages to perk up the economy, and the Bank of Japanlowered the discount rate two additional times to its current rate(as of March 2, 1994) of 1.75 percent. In addition, in February1994, the Hosokawa government adopted an additional package ofstimulus measures–the fifth since 1991. This package includes acombination of one-time tax cuts, including a cut in personalincome tax rates, more public works spending, a small amount offunds for aid to farmers, and an employment subsidy program.(23)
23. Shinmura, Toshio. Short-Term Boost Expected From Stimulus.The Nikkei Weekly, February 14, 1994. p. 1.
A much larger income tax cut had been touted by business groups asan antidote for the economic slump. Until mid-December 1993,however, the Ministry of Finance had opposed any cut in incometaxes unless such cuts were linked directly to an increase inconsumption taxes to reduce the negative budgetary impact of anychange in income tax receipts. The Hosokawa government overcamebureaucratic resistance from the Ministry of Finance and oppositionfrom other political parties by agreeing to adopt a rise in salestaxes from 3 percent to 7 percent one year after the cut in incometaxes to pay for the tax cuts. While the package is not expected tohave a major impact on the economy, some analysts believe the cutin income taxes will stop the economy from deteriorating furtheruntil other forces, presumably business investment or consumerspending, can kick in to move the economy out of recession.
OUTLOOK
Most forecasts currently estimate that the Japanese economy willpick up in 1994. Business sentiment has turned decidedly negative,however, and was more pessimistic in early 1994 than at any time inthe past 18 years.(24) As neither business investment spending norconsumer spending have shown clear signs of reviving, privateresearch institutions in Japan have revised downward theirprojections of Japan’s real GDP growth in 1994 to the 0.3-1.6percent range from forecasts above 2.0 percent earlier in theyear.(25) The Organization for Economic Cooperation andDevelopment (OECD), which had issued its forecast in September ofJapan’s real GDP growth in 1994 of 1.4 percent, has revised itsforecast down to 1.0 percent real growth.(26)
24. Business Gloomy Despite GDP Uptick. The Nikkei Weekly,December 13, 1993. p. 1.
25. Growth Projections Revised to 0.3-1.5% Range for Fiscal’94. The Nikkei Weekly, November 29, 1993. p. 3.
26. Clifford, Bill. OECD Sees Fiscal Stimulus, StructuralChanges as Necessary. The Nikkei Weekly, December 6, 1993. p.3.
A slow, drawn-out recovery for the Japanese economy augurs poorlyfor any quick reduction in the bilateral merchandise trade deficitwith the United States and could impinge on the U.S. economy’s ownrecovery. As long as Japan’s economy lumbers along relative to morevigorous growth in the U.S. economy, U.S. exports to Japan likelywill continue to stagnate, while strong U.S. demand will pull inmore imports from Japan. The Clinton Administration is pressingJapan to do more to spur its economy beyond the tepid fiscalpolicies it already has adopted; however the continued appreciationof the yen may do more to trim the bilateral deficit than anybilateral negotiations. Although the reaction has been delayed andslow, Japan’s continuing current account (exports and imports ofgoods and services) surpluses are causing the yen to appreciateagainst the dollar. While yen appreciation inflates thedollar-equivalent value of Japan’s trade surplus, the volume ofJapan’s exports are being negatively affected by the higher yen andlikely will continue to fall, curbing the current account surplus.
The present recession is affecting some institutions in Japan thathave characterized the post-war economy. Confidence by businessesand others in the government’s ability to handle the economy hasbeen shaken. This loss of faith is especially noticeable regardingthe Bank of Japan over its handling of monetary policy and theMinistry of Finance, whose reputation has been badly bruised overits handling of the financial industry, its implication in variousfinancial scandals, and its dogged resistance to any fiscalstimulus measures that may entail increased deficit financing.(27)
27. Ito, Takatoshi. Losing Face? The International Economy,May/June 1992. p. 46-49.
Furthermore, the Ministry of Finance and the Economic PlanningAgency (EPA) are being criticized for their unrealistic economicforecasts, which have seemed geared more toward presenting afavorable budget forecast (i.e., one that does not rely on theissuance of deficit-financing bonds) than on offering a credibleassessment of the economy.(28) The EPA’s official forecast forFY94 (Japan’s fiscal year runs from April 1st to March 31st), forinstance, projects that Japan’s real gross domestic product willgrow by 2.4 percent. Most Japanese economists consider thisforecast to be more of an unofficial “target” than an actualforecast.(29)
28. How Bureaucrats ‘Fix’ The Numbers. The Nikkei Weekly,January 31, 1994. p. 5; and Iida, Mihoko. Fiscal ‘94 Real GDPGrowth? Government Projects 2.4 %. The Nikkei Weekly, February14, 1994. p. 2.
29. Iida, Fiscal ‘94 Real GDP Growth? Government Projects2.4%, p. 2.
The relationship between firms and their employees, characterizedespecially by the lifetime employment system, is being challengedas firms seek ways to trim their work forces.(30) Most firms havereleased their part-time and contract workers and have taken othermeasures that major Japanese firms typically follow during economicslowdowns, including: reducing hours and bonuses; extendingvacations; reassigning individuals to other jobs; and encouragingearly retirement. The government has even subsidized firms not tolay off employees. Despite these measures, the continued economicslump is forcing firms to target parts of their core, white-collar,predominantly male workers for layoffs. These moves likely willpush Japan’s unemployment rate above the current 2.9 percent anddampen consumer spending, but they could make the labor market lessstructured over the long term.
30. Schlesinger, Jacob M. Japan Begins to Confront JobInsecurity. The Wall Street Journal, September 16,1993. p.A10.
Other Japanese economists believe that as the Japanese economyrecovers from recession, it will find world economic conditionsless amenable to the type of fast-paced growth Japan experienced inthe 1980s. For one, these economists argue that a recovery based ona rapid, short-term expansion in exports is not feasible,considering the attention accorded Japan’s merchandise tradesurpluses by its trading partners and the high value of the yen.Also, other fast-growing Asian countries, especially China, willtake some of the potential export growth from Japan. In addition,Japan is experiencing the 1088 of parts of its manufacturing base,which are relocating to China and elsewhere to escape the priceeffects of the high yen.
Another factor that could impede Japan’s potential economic growthis the limits of technological innovation, since, by most accounts,Japan is no longer in a position of technological catch-up.Changing attitudes on the part of Japanese consumers, who havebecome more prone to seek out discount prices, the lack of adriving industry spurring domestic economic growth (principallybusiness investment spending), and a decline in the Japanese laborforce after 1996 all augur for a slower, rather than a faster, rateof economic growth over the long term.(31)
31. Low Growth Era Seen After Recession. The Nikkei Weekly,January 17, 1994. p. 3.
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