A Feeble and Unstable Recovery
According to The Annual Economic Fiscal Report (July 2004) prepared by the Ministry of Economic and Fiscal Policy, the Japanese economy is recovering from the prolonged stagnation that began with the bursting of the financial bubble in 1990-91. This recovery started at the beginning of 2002. It is characterized by the restored increase of both profitability and spending on plant and equipment in the private business sector and an increase in demand from abroad, while public spending (like public works) has been rather held down. In the fiscal year 2003 (up through March 2004) for instance, the Japanese real Gross Domestic Product (GDP) was said to have grown by 3.2 percent. Contributions to this growth rate came from the growth of domestic demand in the private sector (2.9 percent) and the growth of foreign demand (0.8 percent), offset by a mild decline in government spending (minus 0.6 percent). The annualized rate of GDP growth in the quarter January-March 2004 was said to have reached 5.6 percent and especially encouraged the official expectation of a strong economic recovery.
The Economic Outlook for the Fiscal Year 2005, a document approved by a cabinet meeting on December 20, 2004, similarly emphasized the continuous economic recovery, mainly driven by spending in the private sector. However, estimates of annual economic growth rates (by fiscal years) were sharply marked down. The real GDP growth rate in 2003 was revised from 3.2 to 1.9 percent, so as to give the impression that the growth rate in 2004 had risen. Nevertheless, the projected growth rate in 2004 was reduced from 3.5 percent in July to 2.1 percent. And the growth rate in 2005 was projected to be just 1.6 percent.
It is amazing to see such a wide revision of the most basic estimates of macroeconomic data in a short five month period. Does it not reveal the irresponsibility of the Japanese government in regard to economic management? Indeed, when the government announced in July 2004 figures showing a rather strong economic recovery--no doubt expecting a favorable effect for the governing Liberal Democratic Party (LDP) in the July 2004 Upper House election--Japanese business managers and people in general were taken aback. The announcement was very remote from what their actual experiences in business and economic life were telling them. The revised downward estimation of growth rates confirmed people's day-to-day sense of their economic lives.
These revisions in government data show that the Japanese economic recovery is still far from full-fledged, and in fact, remains feeble and unstable. Even a reversal of the recovery may be at hand. On February 16, 2005, data revealed by the Japanese government showed GDP declining by 0.1 percent in the three-month period ending in December 2004 as compared to a forecast of 0.1 percent growth. The government also revised its July-September figures to show a 0.3 percent decline in the country's GDP, versus the earlier declared 0.1 percent growth. The Japanese economy had contracted by 0.2 percent in the April-June quarter. Following these data, eight private research institutes revised their growth rate projections for 2005 downward, to predict, on average, a rate of 1.1 percent instead of the 1.6 percent forecast by the government. There are four aspects, as we shall examine in the following sections, which make the Japanese economic recovery (if it has indeed not already ended) structurally restrictive, unpredictable, and difficult.
A substantial part of the Japanese economic recovery has been assisted by foreign demand. Its contribution to the 2003 growth rate, as we have seen, was assessed to be 0.8 percent, or a quarter of the total 3.2 percent growth. In fiscal year 2004, Japanese exports are estimated to reach 59.4 trillion yen, or 11.8 percent of GDP, resulting in a 13.4 trillion yen trade surplus as well as an 18. …