Japanese Economic Growth Halted

When Prime Minister Junichiro Koizumi dissolved the Japanese Diet last October and called for new elections, his platform called for raising Japan’s GDP to 2% this year. At the time, this journal wrote that the relatively ambitious target showed just how lame the Japanese economy had become. The first few months after the election suggested that Japan had turned the corner, with first quarter GDP growth at 6.3% and second quarter at 1.1%. Third quarter expectations of 2% growth, if met, would have fulfilled the platform promise. Instead, the annualized figure for the latest quarter was a feeble 0.3%. The champagne must remain corked for some time yet.

Optimists will note that this is the sixth straight quarter of economic growth for Japan. Realists will counter that 0.3% per year is close to flat and not worth discussing as growth. The three factors underlying this disappointing result suggest that deflationary pressures may revive: exports faltered, corporate spending on investment was weak, and domestic demand was nothing noticeable. Any one of these is sufficient to derail economic growth in Japan. All three together suggest that Mr. Koizumi’s efforts have not yet changed the structure of Japan’s economic weakness.

High oil prices, which harm Japan more than other countries because it imports almost 100% of its petroleum, are not the responsibility of the ruling Liberal Democrats. However, experts estimate that the $50 a barrel prices seen in the third quarter may have knocked as much as 0.2% off GDP growth. Growth of 0.5% would have resulted with flat oil prices, and that is still poor. Any suggestions that oil is the culprit are misleading at best.

In a BBC interview, Hiromichi Shirakawa, chief economist at UBS Securities in Tokyo, warned, “The amber light is flashing." It will turn bright red if the Chinese economy, which consumes so much of Japan’s exports, fails in its attempt at a soft-landing. Japan’s public debt is massive, and taxes will have to go up to pay for it. Raising taxes in a weak economic environment, though, is probably worse than letting the debt run wild.

So what can the Japanese do? One clue lies in a very simple but telling statistic. According to the Japanese Minister of Health, Labor and Welfare, Japanese workers are 40% less efficient than American workers. For those in the west who came of age being told Toyota and Sony are models, it is difficult to realize that, while they are indeed models of incredible efficiency, they are exceptions. Making workers more productive is a social change that Mr. Koizumi can’t effect – back in April, he announced that he doesn’t want a third term as PM. Two years won’t be enough.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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