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Buying Again
By Chester Dawson in Tokyo
Far East Economic Review
September 2, 1999
A
mid the thousands of neon signs that make Tokyo's Akihabara district sparkle, Katsumi Sato and his teenage daughter are hunting for a new computer. Making their way through one of the hundreds of crowded PC showrooms in the city's electronics centre, the Satos check prices and try out a few machines. They decide on a $1,000 IBM clone. "It's not a must-have," says the 48-year-old white-collar worker, "but more of a hobby item." It's also one of hundreds of thousands of PCs flying off store shelves across Japan--domestic PC shipments rose 38% in the second quarter from a year earlier. And Sato is one of a growing number of recession-shy consumers who are prying open their wallets, boosting Japan's chances of finally pulling out of its lengthy economic slump.More shoppers appear to feel it's again safe to start spending--even on things that aren't essential. A raft of positive economic data has come out in recent weeks and there are faint signs the country could be on its way to a sustainable recovery. Optimism, however guarded, is suddenly back in vogue after years of almost uniformly bleak predictions about the economy. "The positives are starting to outweigh the negatives," says Jesper Koll, chief economist at Merrill Lynch in Tokyo. "These are the straws in the wind."
True, the Japanese economy has had a number of false starts in recent years. But this time, say optimists, there's a difference. Japan Inc. is finally starting to get serious about restructuring--both to cut costs and to take advantage of deregulation and new technology that will help firms catch up with more efficient global rivals. Also, a government bailout of cash-starved banks has shored up shaken confidence in the country's financial system. Now flush with public funds, banks are starting to consolidate to get economies of scale. In the most far-reaching realignment so far, three of the country's top commercial banks unveiled plans on August 20 to merge into a holding company by 2000. Investors--mostly from abroad--like what they see and are betting big on a recovery. Tokyo's benchmark stock index is up more than 30% so far this year.
The bullish mood is a welcome change for Japan's neighbours, who are anxious to see a rebound in the world's second-largest economy. Despite still-sluggish consumer demand, the Japanese market absorbs about a third of all exports from other Asian nations. "Japan remains absolutely critical to the region," says Nalin Samarasinghe, director of the Tokyo office of the Asian Development Bank. Demand from Japan may already be helping to rekindle economic activity in other parts of Asia. Imports from Hong Kong, Singapore, South Korea and Taiwan rose 1.8% in the first half of the year. While not red hot, that's a big improvement from an 11.7% drop in 1998.
Japan, of course, could still be blown off the path to lasting recovery. If the yen's recent appreciation against the U.S. dollar continues, for example, profit growth at the country's mighty exporters will take a beating. A turnaround could also be cut short by a policy misstep such as the sales-tax increase in 1997 that snuffed out growth and sent the economy into a tailspin. Few economists expect a repeat of the torrid annualized expansion rate of 8.1% seen in the first three months of the year now that the impact of public-works spending is waning. When he released revised first-quarter GDP figures in August, Economic Planning Agency head Taichi Sakaiya told reporters it would take an additional Yen10 trillion ($90 billion) in government spending to achieve a modest forecast of 0.5% growth for the year. The fact that it comes on top of Yen10 trillion in public spending already in this year's budget may spook bond investors by adding to the government's mounting debt. Observers see it as a price the government is willing to pay. "It's pretty clear that the economy has stopped deteriorating," says Yasuhiko Ushikubo, a senior economist at the Industrial Bank of Japan. "But it's not yet on an upward trend, either."
The positive data is changing some attitudes, though. Even the cautious International Monetary Fund is warming to Japan, revising its 1999 growth projection for the country on August 13 to 0.2%, compared with an earlier forecast of a 1.4% contraction. "We are getting close to a self-sustaining path," says Jeffrey Young, an economist at Nikko Salomon Smith Barney. Indicators adding to the growing sense of optimism include the following:
-- Machinery orders, a bellwether of corporate capital spending, grew 6.3% in June from the previous month for the biggest gain in 10 months. The EPA now expects orders to rise 4% in the current quarter--the first forecast of a quarterly increase in 18 months.
-- Industrial production in June climbed 3.2% month-on-month as companies stepped up output to make up for declining stocks. The trade ministry also says inventories at companies fell 0.3% from May and 8.9% year-on-year. That means any pick-up in consumer demand will likely lead to a further rise in production.
-- Home sales are up, largely as a result of government loan and tax incentives. After falling for more than two years, housing starts stabilized in March and rose a higher-than-expected 7.3% from a year earlier in June.
-- The government's index of leading indicators, a grab bag of statistics that serves as a barometer for the overall economy, hit 60 in June, well above the boom-or-bust level of 50 for the fourth consecutive month.
Most important to a self-sustaining recovery is a return of consumer spending, which accounts for about two-thirds of the overall economy. Consumer confidence has been shaken in the past year by the failures of major banks, record unemployment and falling income levels. But here, too, there are tentative signs of a rebound. The government says household spending in the second quarter rose 2% from the previous three months. Young says consumers are starting to spend as the government's Yen60 trillion programme to stabilize the financial system allays fears of more bank failures.
Lower prices are also enticing people back to the shops. "Prices have come down to an affordable level," says PC-buyer Sato. There is a risk that a combination of falling prices and sluggish demand could form a liquidity trap in which government pump-priming efforts are offset by expectations of lower prices that lead people to wait a bit longer before making purchases. But the threat of a dangerous deflationary spiral, which gained currency a few months ago, appears to have subsided. The central bank says wholesale prices in July actually rose 0.2% from June.
Ironically, much of the hope for recovery is pinned on corporate restructuring--the very bugbear that has weighed on consumer sentiment by provoking worries about job security. The hope, of course, is that short-term pain will lead to longer-term gains in the form of higher profits, increased investment and--eventually--rising demand for labour. But for the time being, Japan may be in line for a "jobless recovery" much like the one in the United States in the early 1990s that set the stage for its current boom.
Sceptics still doubt whether Japan Inc. is committed to downsizing, but a growing number of analysts see progress. Outright dismissals at top firms remain rare, but staff levels are falling as a result of hiring freezes and early retirement. Companies are selling off or shutting down unprofitable units and starting to link employee pay to performance. "There is a lot of restructuring going on," says Martin Reeves, a vice-president in the Tokyo office of the Boston Consulting Group. "The only question is whether they're doing it fast enough" to remain globally competitive.
NEC, Sony and Toyota Motor have made headlines in recent months with their reform efforts, but the less-is-more mantra isn't limited to blue chips. Mobile-phone-parts maker Hosiden, for example, has cut staff, reduced its debt load and alleviated a heavy investment burden by merging its flat-screen monitor division into a joint venture with Philips. Sausage producer Nippon Meat Packers pulled itself out of the red in the year to the end of March by cutting back on inventory and staff, selling off employee recreation facilities and expanding its line of ready-made foods--a high-growth niche.
Tsuyoshi Yabe, the manager of a Mazda Motor outlet in suburban Tokyo, needs no convincing of the power of restructuring. With overall vehicle sales falling for the past 28 months, he knows he has a tough sell. But he credits Mazda's largely successful effort to prune its sales network and remake its stodgy image for increased sales at his airy showroom. His team sold 37 cars in July, up from only about 20 a month at the start of the year. "People really do want to buy but they also worry about spending their money, so it all comes down to an attractive product line-up and good salesmanship," he says.
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