Fri, Sep 05, 2003 page9

• Japan's economic stability in the hands of the policy-makers

  • AFP
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  As surely as the Olympic Games come round every four years, Japan's economy is once more on track to a cyclical recovery, but only competent government policy will make this latest rebound sustainable, economists said.

  "It's the four-year cycle, the Olympic cycle," said Masaaki Kanno, chief economist at JP Morgan in Tokyo.

  "It's hard to say what will happen in 2005, but looking back at other business cycles it is quite likely the growth rate of the economy next year will be the peak and after that it might turn down."

  Most economists feel the government will once more fail to take advantage of the upturn -- the third since Japan's 1980s economic bubble burst 13 years ago -- though some speculate Prime Minister Junichiro Koizumi may still make good on a pledge to implement meaningful change.

  "I don't think the problems in Japan are in any way insurmountable. What they do require though is very hard-headed and competent forms of policy-making," said Paul Sheard, chief economist for Asia at Lehman Brothers.

  "The government and Bank of Japan [BoJ] have to pull a number of levers to get the economy moving again."

  The Asia financial crisis helped to derail a revival in Japan that peaked in 1996 -- the same year as the Atlanta Olympics -- and when the four-yearly games were held in Sydney in 2000, the collapse of the information technology boom tripped up fresh signs of economic life here.

  This time around, investment banks have been falling over each other to upgrade growth forecasts for the world's second largest economy this year and next year following surprisingly strong gross domestic product in the June quarter.

  JP Morgan recently revised its GDP projections for Japan next year to 1.8 percent from 1.2 percent seen earlier, while growth this year was currently expected to hit 1.9 percent, and Kanno said the bank's forecast for next year had room for an upgrade.

  Hopes for an economic recovery in Japan were given an additional boost on Friday after fresh data showed a pick-up in industrial output and the level of joblessness held firm.

  The government said industrial output in July rose 0.5 percent from the previous month due to strong demand for hi-tech products while the nation's jobless rate in the month was unchanged at 5.3 percent.

  Stock prices have rebounded by 36 percent from a 20-year low in late April, powered by hopes the global economy is on the mend along with fresh confidence in Japan as private consumption rises and firms spend more on factories and equipment.

  A 6.0 percent drop in salaried household spending in July from a year earlier announced on Friday, the largest year-on-year decline since March 1994, was shrugged off by economists as a one-off aberration due to an unusually cool summer that would not have a major impact on overall economic growth.

  However, deflation does continue to restrict economic growth and must be defeated to enable Japan to resolve its underlying problems, such as a banking system riddled with bad loans and massive government debt, economists warned.

  The government also said on Friday consumer prices in July fell 0.2 percent from a year earlier, extending their decline to a 47th consecutive month.

  Koizumi and the central bank have pledged to halt sliding prices by the year to March 2006, noted Sheard from Lehman.

  In addition, a plan devised by Financial Affairs and Economy Minister Heizo Takenaka aims to halve the percentage of bad loans at Japanese banks -- cited as a root cause of the nation's economic stagnation -- by March 2005.

  Policy coordination between the government and BoJ, which since March has been under the direction of a seemingly more pro-active new governor, Toshihiko Fukui, is imperative to drive through real change.

  But many economists note Japan's track record for restructuring is poor as complacency sets in too easily once signs of a revival emerge.

  "Good incentives go out of the window when you get some growth," said ING's chief economist in Japan, Richard Jerram.

  "If there was competent management they would try to capitalize on the upswing."

  As preparations for the 2004 Athens Olympics enter the final straight, the Japanese economy is poised to enjoy its strongest year of economic growth in the past three, according to JP Morgan's Kanno.

  "If we assume the current stock prices sustain the level they are at then confidence will remain, consumption may hold up and capital expenditure will continue to grow," he said.

  This recovery, though weaker than in 1996 and 2000 due to a drop in fiscal support as the government attempts to control ballooning debt, is supported by renewed growth in key regions such as the US and Asia.

  However, "none of that left to its own devices is really going to be enough" to ensure lasting prosperity, said Sheard.

  "If policy makers fall asleep at the wheel again I think we will go through the cycle and back into a downturn, which will bring all of these bigger issues back on to the radar again," he cautioned.

  "It is all in the hands of the policy makers."
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