The Japanese economy is set to remain weak for the coming year as the signs of deterioration continu...
The Japanese economy is set to remain weak for the coming year as the signs of deterioration continue to mount.
Despite the government's assertion that GDP growth will be flat for the year ahead, the consensus suggests the official line is somewhat optimistic. Andrew Smithers, chairman of Smithers & Company, says GDP growth has been negative for the past four years, both in nominal and real terms.
He adds: 'Official estimates of zero growth in 2002 look over-optimistic. GDP peaked four years ago, in the first quarter of 1997. Since then, it has fallen at 1%pa in nominal terms and marginally in real terms.
'The Japanese economy is in dire straits and the outlook is likely to be even worse than the consensus expects.'
Michael Deakin, chief investment officer at Clerical Medical Investment Management, is also bearish on the market's outlook in the short to medium term.
He points to Moody's downgrading of Japan's credit rating last month, which followed similar moves by Standard & Poor's and Fitch, as further evidence of the economy's spiralling stagnation.
Deakin says: 'The government's rising debt and the lack of solutions to the country's problems were cited as the key factors behind the decision. Moody's also warned that deflation was exacerbating the situation.'
The ability to respond to the ailing economy has long since passed out of the hands of the Bank of Japan, Smithers believes, and the responsibility now firmly lies with the government.
He says: 'In terms of policy, the Bank of Japan has probably become irrelevant. The only direct action it can take is to increase the monetary base and as Japan is in an effective liquidity trap, this is unlikely to have any significant impact on monetary supply.'
As such, only the Japanese government can pull out the measures required to lift the economy, he adds. Deakin says it has tentatively moved toward putting the requisite reforms in place but adds that reforms sanctioned have been watered down to such an extent that they may no longer be far-reaching enough to have a significant impact on the economy. They could, however, reduce the burden on government spending.
Deakin says: 'In December, the Japanese cabinet approved a greatly reduced version of his plans to restructure 163 state-backed institutions. These privatisations aim to relieve the burden on the government's annual spending, generating a saving of around $8bn in 2002.
'The plans may be far less comprehensive than the economy needs but it demonstrates that reform plans are in progress, albeit at a slower pace.'
Smithers says the stock market is dependent on foreign buying and is likely to remain so for the short to medium term, implying a global pick-up would facilitate a stimulus to the economy.
The outlook for the yen also remains negative. Smithers says it is very unlikely the economy will recover without the currency being significantly weakened. His concerns stem from the pressure to devalue the already mildly weak yen, which could decrease as a US turnaround becomes more visible.
He says: 'Domestic companies need inflation to improve their balance sheets and that is dependent on a major fall in the exchange rate.'
Policy measures under way.
Growing awareness that yen needs to fall.
US recovery expected in 2002.
Japan likely to underperform this year.
Bank of Japan inert in aiding recovery.
Persistent deflation curbing growth.
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