Perhaps more so than ever, the Japanese economy is presenting quite a challenge to those wishing to ...
Perhaps more so than ever, the Japanese economy is presenting quite a challenge to those wishing to discern a clear picture. To outline our current view, a little background is required.
Following the collapse of the bubble economy in the late 1980s, confidence was systematically eroded as the government turned a blind eye to growing banking sector indebtedness, culminating in the crisis of 1998 and recession.
Throughout the decade, attempts to tackle the symptom rather than the cause of the malaise by injecting huge amounts of capital into the economy floundered due to poorly targeted and wasteful infrastructure projects.
With no available credit from the broken banks, firms were under increasing pressure to cut costs in the face of weak demand, raising the unprecedented prospect of redundancies. Household and business confidence fell to an all-time low as unemployment started to climb.
Moving forward, the last 12 months have yielded light at the end of the tunnel. Prompted in part by strong economic recovery in the Pacific Rim area, improving demand has bolstered sentiment and revivified industry, prompting consumers to brush the cobwebs from their wallets. The much-needed restructuring of the old economy also appears to have begun, albeit slowly. With these developments we have seen the equity market perform very strongly. However, doubts remain as to the sustainability of this fragile recovery.
A key threat remains the possible realisation amongst workers that their jobs may still be at risk despite the ongoing recovery. A real shakeout in Japan's notoriously overmanned labour market has never happened but this may be about to change as several large companies have announced significant redundancy plans.
However, many of these plans scheduled to take effect over several years during which weak management may be forced to back down. The latter would undoubtedly be positive for household confidence and the short-term path of the economy but only at the cost of longer-term potential growth. Moreover, there are signs that the labour market has already started to stabilise with sensitive labour-demand indicators on the rise.
Having a job is one thing, what it pays is another. Household incomes continue to be squeezed as firms have slashed twice-yearly bonuses, a major component of household remuneration. However, this has not stopped consumer spending rising since the start of last year. The reckless imposition of tax increases in late 1997 was partly responsible for the recession that followed and prompted household savings to soar.
As the public has regained confidence in its government these savings have been run down, counteracting the decline in incomes. The fuel for this to continue is confidence, which is at best difficult to forecast.
With a new fiscal package waiting in the wings, however, plus the global economy gathering pace, to the glee of Japan's exporters, the chances of households continuing to use their rainy-day money do not look bad.
On balance, there is no doubt that the recovery remains fragile and in order for it to continue households will need to remain cheerful as the economy battles against significant structural headwinds. Japan showed in 1995/6 that it is still capable of surprising and it now has an administration that the general public believes in. A strong recovery is by no means a certainty and after 10 years of ups and downs nothing can be taken for granted but perhaps now, as we enter a new decade, we may be seeing a new, different Japan.
Neil Mellor is global economist at Henderson Investors
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