Newspaper article The Christian Science Monitor

Japan Breaking out of Economic Slump ; Eight Years of Deflation Are Expected to End in 2006, Boosting Consumer Spending

Newspaper article The Christian Science Monitor

Japan Breaking out of Economic Slump ; Eight Years of Deflation Are Expected to End in 2006, Boosting Consumer Spending

Article excerpt

Christmas came a few days early in Japan when the government announced Monday that the economy was likely to emerge in 2006 from eight years of price deflation.

The stock market obligingly powered to a new five-year high, briefly topping 16,000 points on Wednesday, underscoring that many feel the nation's long economic slump is ending.

Declining consumer prices in Japan have wreaked havoc on the world's second-largest economy by encouraging shoppers to delay purchases of everything from refrigerators to houses. With consumption accounting for about 55 percent of GDP, the disincentive to spend has caused a decade-long vicious cycle of falling corporate profits, departure of producer capacity overseas, downward pressure on incomes, and scores of bankruptcies.

But the foundations of a consumer-spending turnaround were laid when wage deflation came to an end some time last year, partly as a result of improvements in the job market, says economic analyst Naoko Yano at Mitsubishi Research Institute. "As stronger corporate profits begin to filter more fully into pay packets, both higher incomes and better sentiment toward the economy is likely to help further boost individual consumption," she says.

To be sure, the chiefs at the Ministry of Finance expect the transition from deflation to inflation to be fragile at first. The report released Monday predicts consumer prices will rise a mere a 0.5 percent next year. But economists see positive signs, at least until the end of the decade, as asset-rich baby-boomers retire and divest their savings into the economy at large, and their children move into higher-paid jobs and buy property.

A surge in property investment is already under way in major urban areas. While land prices nationwide plunged 67 percent over the past 14 years, property values in central Tokyo rose 0.5 percent this year for the first time since 1991. Areas of Osaka and Nagoya also posted gains.

Foreign investors have been quick to jump on this trend, snapping up idle golf facilities, suburban malls, and tony apartment complexes.

Real estate investment trusts have become popular with individual and corporate investors, helping fuel redevelopment of many business districts. Areas like those near Tokyo Station are almost unrecognizable from even five years ago as skyscrapers replace drab office space dating from Japan's postwar building boom. Research firm IDSS Co. expects office rents in central Tokyo to rise in 2007 for the first time in 15 years.

Foreigners have also been a key factor in rising stock prices. Despite new highs this week, many analysts expect the pace of gains to slow, as overseas markets have been left in the dust by the blistering pace. The Nikkei has gained more than 30 percent from the beginning of 2005 compared with around 2 percent for the Dow Jones Industrial Average, 15 percent for the FTSE index in Britain, and 20 percent for the DAX in Germany.

Still, there are few concerns over the economy itself. Unrecoverable loans have been written off, and corporations that had been burdened for years with massive repayments on bad investments now have increasing leeway to plow some profits back into infrastructure and research. …

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