Video #6 - Japan's Fragile Economic Recovery
Monday, January 09, 2006BACKGROUND INFORMATION
Japan's output shrank in the third quarter of last year, sustaining pressure on the Bank of Japan to act decisively to revive the world's second-largest economy after a decade of slow growth. Gross Domestic Product (GDP), the total output of goods and services, fell 0.6 percent in the July-September period from levels of the previous quarter, instead of rising by 0.2 percent as initially estimated. It was the first quarter of contraction since October-December of 1999. The revision, reflecting weaker business investment, had been expected and the government said it was sticking by its forecast of 1.2 percent growth for the whole of fiscal year 2000/2001, which ends on March 31.
“I don't think we need to change our expectations for a self-sustained recovery at the end of this (fiscal) year and into the following year,” said Vice Economics Minister Eiji Kawade. Still, Peter Morgan, an economist with HSBC Securities, said a revision in business investment growth in the third quarter to just 1.5 percent, from an initial estimate of 7.8 percent, was bad news for the economy. “It suggests that capital spending, though it is recovering, is not that strong. Since that was supposed to be the leading edge of the recovery, the overall growth prospects are not that strong,” Morgan said. “The risk of recession is higher.”
The most significant revision made to the GDP figures since 1978 indicates that corporate Japan is not making a significant contribution to getting the economy back on track. The slower growth suggests that corporations, a driving force of the economy, are not investing in new equipment and machinery as aggressively as economists had believed.
The Cabinet Office also downgraded its assessment of other parts of the economy - consumer income, exports, corporate profits, business confidence, workers' overtime hours and prices.
Additionally, personal consumption remained flat from the previous quarter in the revised data, indicating that worries about a wobbly stock market and wave of corporate restructuring continue to discourage consumers from spending. Stagnant consumer spending, which accounts for roughly 60 percent of GDP, has been a major drag on the economy.
A government survey of 4,540 companies taken on December 25 also showed growing pessimism that a sharp slowdown in U.S. growth would hit Japan's exports. But it also showed that capital investment plans remained fairly solid, leading several economists to conclude that Japan is unlikely to tip over the edge into a full-blown recession.
Japan's ruling party politicians, who have been steadily applying pressure on the Bank of Japan (BOJ), immediately demanded action from the central bank's Policy Board.. Shizuka Kamei, the policy chief of the dominant Liberal Democratic Party (LDP), told parliament's budget committee that the BOJ should take radical steps to pump up the money supply or cut already-low short-term interest rates.
The GDP revision supports the claims of critics of the Bank of Japan, who say the central bank acted prematurely last August when it ended its 18 month experiment with free money and raised short-term interest rates to 0.25 percent from zero. Beyond temporary measures to avert a cash crunch at the end of the business year, the central bank is being urged by some politicians and academics to take action, such as setting a target for inflation or money-supply growth, to try to reverse a well-established trend of falling prices. Domestic wholesale inflation figures for January confirmed the downward pressure on prices. (They fell 0.2 percent from December). Deflation deters consumers from buying because they anticipate even lower prices in the future - and it means companies must earn more profits to service their heavy debts.
Morgan at HSBC, “I don't think there is a lot they can do about it and even if there was, they don't seem willing to, either on the fiscal or monetary side. The Bank of Japan is stubborn, and the Ministry of Finance and the politicians are less inclined to resort to large fiscal stimulus packages, because they are less politically popular,” he said.
The soft Japanese economy is also affecting the nation's currency and stock market. In the past year the yen has fallen 5.7 percent against the dollar, recently trading at 115.76 yen per dollar, up 0.35 yen from its previous close. The benchmark Nikkei 225 stock index has lost 33 percent of its value in the past year, while 10 year bond yields have fallen near a 20 month low.
Undoubtedly, the world's second-biggest economy is caught in the crossfire from two fronts: the threat of recession and the electoral calendar, with the ruling Liberal Democratic Party facing heavy casualties in upper house polls to be held in July. The Bank of Japan, led by governor Masaru Hayami, ceded ground on February 9 to the conservative LDP by announcing it was cutting its largely symbolic discount rate for the first time since September 1995, to a record low 0.35 percent from 0.5 percent.
Hayami has insisted the problems facing the Japanese economy result from structural deficiencies, which only the government can fix through accelerated economic and corporate reforms. For that reason he has opposed LDP pressure on the Bank of Japan to head in the radical direction of quantitative monetary easing, or to directly underwrite the mountain of government debt. The latter policy is called monetization, and would effectively entail the central bank printing money as a quick inflationary fix to drag Japan out of its deflationary spiral.
For Hayami, the independent Bank of Japan risks destroying its credibility if it caves in to political pressure. For the LDP, however, July could spell electoral disaster under the deeply unpopular Mori as the economy tanks again.
SOURCES:
“Bank of Japan lives to fight another day.” Agence France-Presse, February 11, 2001. http://asia.dailynews.yahoo.com/headlines
“Japan's Economy Contracted in 3Q”. Associated Press, February 7, 2001. http://biz.yahoo.com/apf/010207/japan_econ_2.html
“Japan Lowers Economic Assessment 2nd time in 2 Years.” Bloomberg, February 16, 2001. America Online
Nishikawa, Yoko, “Japan crosses fingers on growth after GDP shrinks.” Reuters, February 8, 2001. http//biz.yahoo.com/rf/010207/t84812.html
LESSON PLAN
GRADE LEVEL/SUBJECT: 10-12/Economics, International Relations, World History,
International Bachelaurate Programs(IB), Current Events.
PURPOSE: To present activities to be used at a variety of classroom situations in order to enhance student understanding of the Japanese economy and its significance globally.
OBJECTIVES:
Students will be able to:
- Define recession.
- List the indicators of a recession.
- Synthesize the effects of a recession on the economy.
- Explain the role of the Bank of Japan in that country's economy.
- Compare and contrast the function of the Bank of Japan with that of the Federal Reserve in the U.S.
- Analyze the effects of monetization.
- Evaluate the effects bank interest rates have on a nation's economy
- Forecast the future of the Japanese economy.
MATERIALS:
- Background information provided.
- Resources on Japan available at your school's Media Center and the Public Library
System in your area.
- Background information available through Internet “search engines”.
ACTIVITIES: May be assigned as group activities or as individual tasks. They may also be designed as preparation for related presentations either by individuals or groups.
- Create a Venn Diagram to compare and contrast the functions of the Bank of Japan to that of the Federal Reserve in the United States.
- Simulate a meeting of the Bank of Japan's Policy Board.
- Simulate a meeting of the Cabinet Office (formerly the Economic Planning Agency).
- Write an editorial on the policies presented by the above bodies.
- Develop a forecast for the future of the Japanese economy based on one of the policies presented. (Each cooperative learning group may base their forecast on a different set of policies and their expected outcomes.)
EVALUATION:
Individual assignments should be graded by the teacher using established criteria.
Group activities, presentations and projects may be evaluated by teachers and students using the following criteria and scale:
Content Creativity Clarity
1= Superior (A) 2=Excellent (B) 3=Good (C) 4=Fair (D) 5=Poor (F)
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