The year ahead - Japan

Japan, Inc., Jan, 2003

Then we have the Western media, which have been unrelentingly wrong in their diagnoses and remedies for the

Japanese economies. Guiltiest has been the Financial Times of the UK and the Wall Street Journal of the US, both heavily caught up in the same free-market, supply-side fundamentalism that also did so much damage to the Russian and many other economies around the world. The International Herald Tr bone has not been much better. The influential Foreign Affairs has run a constant barrage of articles sounding off about Japan's many structural imperfections. None are interested in running contrary opinions.

Within Japan, the situation has been confused, with the normally right-wing Yomiuri Shimbun stable pushing a solitary campaign for controlled inflation and Keynesian fiscal stimulus policies, while the rest have gone along with the tide favoring Koizumi. The progressive Asahi Shimbun, which should know better, remains enthralled by the word "reform."

The Nihon Keizai Shimbun's position has been interesting. As the main economic newspaper, it has clout. For a while it went overboard for the Hashlimoto and then Koizumi policies, making little effort to disguise its fundamentalist and tightwing bias. Keynesian policies were denounced as outdated left-wingism. I used to get a good run in its pages, but was put firmly on its blacklist after I came out in open criticism of its fundamentalist line.

But starting about two years ago, the Nikkei seems to have suffered a sea change. It began to challenge the Koizumi line occasionally. A year ago, when Takenaka came out with yet another of his typically arrogant White Papers condemning "outdated Keynesian theories," it asked gruffly how an economy clearly lacking demand could recover by further reducing demand. Good question. Just wish it had been asked earlier.

The ECONOMY Contraction, Rise in Unemployment Ahead.

Peter J. Morgan, Ph.D, and chief economist of HSBC Securities (Japan)

THE JAPANESE ECONOMY ENJOYED a modest recovery in 2001 due to a sharp rebound in global growth and exports, but exports now show signs of peaking out. Although the global economy is expected to show sluggish growth next year, this may not be enough to prevent the economy from tipping back into recession. As a result, the economy is likely to shrink for the third year in a row on a calendar year basis, and the unemployment rate will start to rise again.

The economy suffers from numerous problems. First, HSBC estimates that the output gap -- the difference between actual and full-employment (potential) GDP -- is about 5 percent, by far the largest for developed countries. This is the primary reason for the persistent deflation that the economy has experienced over the past four years. In order to end deflation, the gap would have to be reduced by about 3 percentage points of GDP.

Second, private debt levels remain very high by international comparison, mainly a legacy of the binge of borrowing during the bubble period. Although the ratio of corporate debt to GDP has fallen dramatically from 151 percent of GDP in 1995 to about 115 percent currently, this still compares unfavorably with ratios of about 70 percent for the US and major European countries. The steady reduction of debt by the corporate sector and the accompanying decline of private capital investment have been key reasons for weak demand for credit. Household debt has been more stable at about 67 percent of GDP, but debt-servicing costs have tended to depress consumer spending and borrowing as well.