Call us party poopers, but aren't yen bulls being irrationally exuberant? Last week, the Japanese currency rose to 103.25 against the dollar, a three-year high. Now, the Bank of Japan's decision against loosening money supply gives even more momentum to the currency. Make no mistake, the yen's rise has been predicated on yen strength rather than dollar weakness--the dollar has not declined to the same degree against other major currencies. Besides currency traders staking a position on the yen, the rise has as much been fuelled by foreign purchases of Japanese equities since June. In other words, there has been a positive re-evaluation of the Japanese economy following the January-June GDP rises. But just listen to Taichi Sakaiya. Mr. Sakaiya, head of the Economic Planning Agency, said that to keep the economy growing, "a seamless continuation of government spending is indispensable." There you have it, a candid admission that Japan hasn't yet achieved a self-sustaining recovery. So buy the yen? The smart money has been shorting it.
The numbers tell all. In April-June, capital expenditure dropped 13.4% on an annual basis and manufacturing expenditure plunged 24.6%, its biggest annual decline since 1965. So no, business hasn't much contributed to growth. Look instead at government spending. Here, think about this: Japan's deficit spending currently amounts to 10% of GDP, and the tangible result so far has been a 0.2% quarterly growth in the latest reported period. Try out this strategy in the real world, in a private company, and shareholders would cry for blood. But in Japan, politicians and bureaucrats have honed to perfection the art of ignoring public interest.
The cynicism here is appropriate to the shellgame bureaucrats play, shuffling around public funds. For more evidence of this, note discussions that even if the economy contracts 0.5% each quarter through March 2000, Tokyo still would hit its half-a-percentage point growth target for the fiscal year. Now imagine civil servants wearing down the keys on their calculators, trying to figure out just how much more to spend to prime the economy. Mr. Sakaiya's estimate is as much as Yen 5 trillion ($37 billion).
Meanwhile, the real impediment to honest growth remains unaddressed. Although consumer spending edged up in the last two quarters, unemployment has as well. In July, the jobless rate stood at 4.9%, a record. Tokyo's response has been to promise to spend Yen540 billion to create new jobs, many in the civil service.
Yet the real issue in Japan's dilemma is simple: taxes. The top corporate tax rate is 40%. When government takes this big a bite out of profits, it saps business' ability to grow and hire more workers. In fact, taxes lie at the heart of Japan's malaise: from the consumption tax to the top total personal tax rate of 50% to corporate taxation, all of which effectively penalizes the economy. Yet Tokyo has been reluctant to act further here, because returning the decision on the economy to people and business dissipates the bureaucrats' own control. But until genuine economic players are empowered, Japan will remain in the Twilight Zone, where businesses continue to languish despite statistical evidence of a growing economy.
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