Capital investment is shrinking and exports inclined


By Ali Farhan Chaudhry
Sep 09 - 15, 2002

Japan suffered decade long recession that in real terms has snatched purchasing power of the people and that in return has reduced the domestic consumers' demand and increased the unemployment. Japan is basically an export-oriented country and exports are comprised of major portion of the economy. Recent rise in exports helped Japan's economy to grow 0.5 per cent in the April-June quarter.

The rise in gross domestic product, the broadest measure of production of goods and services, had expected and translated into an annualized gain of 1.9 per cent. At the same time January- March figure was revised to just 0.0 per cent, or an annualized contraction of 0.1 per cent, from the 5.7 per cent growth estimated by the government in June and making Japan's recession last year longer than previously thought. Further analysis showed that the 0.0 per cent GDP figure in January-March was rounded up from a negative number, meaning the economy actual in May when it rose from 5.2 per cent in April.

Japan's unemployed rose 220,000 from the previous year to 3.52 million, up for the 16th straight month. The number of employed, including self-employed, fell 780,000 to 63.74 million. Jobs condition in Japan are worsening as one figure from the Japan's Ministry of Health, Labour painted reality that for every 100 job seekers at government-run job agencies, there were 54 jobs available in July.

Capital investment in Japan is shrinking, reflecting the fact that both the local and international investors are loosing confidence in Japan. The GDP report showed that capital investment fell 0.5 per cent in April-June from the previous quarter. That leaves exports as Japan's primary economic fuel.

Now come towards Japan's exports that inclined 5.8 per cent in the April -June quarter, up from 4.8 per cent in January to March. As a result, external demand contributed 0.3 per cent to GDP in the quarter, better than the 0.2 per cent from demand at home. But currently Japan is caught in very difficult situation as its exports are loosing steam because of appreciation in the Japanese yen that gained more than 13 per cent to one and half year highs of 115.50 yen from 133.80 yen against dollar since April 01. Japan's exports are dampening because goods' prices are not competitive in the international markets.

Japanese exporters narrowly watch developments in the United States as most of their exports are towards where consumer confidence is persistently falling and affecting retail sales in the United States. American consumers became much less confident about the economy in August. The Conference Board, a business-backed research group, said its index of consumer attitudes fell to 93.5 in August its lowest level since November 2001 from 94.7 in July against the expectations of 97.0. Consumer spending represents two-thirds of the U.S. economy. Steep falls in the US stocks are also weighing on the US nation's wealth that reduced in recent US stocks and corporate crisis.

Meanwhile both the Bank of Japan and Finance Ministry continued their efforts to make yen weak versus dollar, as they knew it very well that only a soft currency can boost Japan's economy. Overnight Bank of Japan intervened seven times this year in the international Forex market and sold yen and bought dollar. Japanese officials also contributed struggle to make yen weak, as Japanese Vice Finance Minister for International Affairs Haruhiko Kuroda said the ministry was closely monitoring the foreign exchange market and would take appropriate action as needed. Japanese Finance Minister Masajuro Shiokawa said that the dollar was recovering against the yen as he had hoped. He said Japan would act against excessive volatility in the currency market. In this regard Senior Japanese Finance Ministry official Zembei Mizoguchi said rapid moves in forex market were undesirable.

Meanwhile, Japan's economic outlook was briefly supported after Bank of Japan's "tankan" corporate sentiment survey came in much better than expected. Diffusion index for large manufacturers improved to minus 18 from minus 38 in the previous survey in March, beating forecasts for an outcome of around minus 26. Indices for non-manufacturers and small firms also improved more than expected.

The Bank of Japan's survey also forecasted that major manufacturers expected an improvement in sentiment in September for the fifth straight quarter. And non-manufacturers expected an improvement in September for the second straight quarter. For smaller manufacturers, the diffusion index showed an improvement for the first time since December 2000, and the figure, at minus 41, was the best since June 2001. An improvement of 10 points was the largest since 1994. Smaller manufacturers also expected sentiment to improve to minus 35 in September, which was the first forecast for improvement since September 2000. Smaller non-manufacturers' forecast for sentiment in September showed a worsening of one point to minus 38, which would be the seventh straight quarter of worsening, though the smallest since September 2000. It was the first time that the four main categories, big and small manufacturers and non-manufacturers to rise simultaneously since September 2000.

On the political front Japan's Prime Minister Junichiro Koizumi is facing problems to induce structural reforms demanded by financial institutions such as International Monetary Fund (IMF) and World Bank. But he might receive minimum support from the Bank of Japan because discount rates already are standing close to zero at 0.10 per cent and had no more room to cut it further to kick back the fragile economy. On the other hand it seems that the Bank of Japan will have to do something exceptional to keep the weak recovery alive.

Recession-weary Japanese got details of a government plan intended to break a three-year spiral of falling prices. Aimed at breathing life into the Japanese economy, Prime Minister Junichiro Koizumi's anti-deflation package, tackles a hit list of economic woes, from bad debt and sinking stocks to dried-up credit lines for small businesses.

SPEED UP DISPOSAL OF BAD BANK LOANS: The government estimates Japan's commercial banks are saddled with some 43 trillion yen (USD 323 billion) in bad debt, while private estimates run as high as double that amount. Writing off those losses may give banks a fresh start to finance the economy's expansion.

PRESSURE DEBTOR COMPANIES RESTRUCTURING: The worst offenders will be asked to adopt solid turnaround programmes or face the possibility of folding.

URGE CENTRAL BANK TO LOOSEN MONETARY POLICY: Bank of Japan Gov. Masaru Hayami has already indicated that he will comply, possibly by cutting interest rates further or buying more government bonds to inject even more cash into the system. Typically, the more money in circulation, the faster prices tend to rise.

BUOY JAPAN'S SINKING STOCK MARKET: The plan calls for tightening restrictions on short selling, an investment strategy that bets on stocks declining. Government officials have said they want to keep the Tokyo exchange's Nikkei index from falling much below its current level around 10,000. A government-backed stock-buying entity called the Banks' Shareholding Acquisition Corp. will be charged with buying up to 2 trillion yen (USD 15 billion) shares from banks, which are selling to meet new stockholding restrictions.

FREE UP CREDIT FOR SMALL- AND MEDIUM-SIZED BUSINESSES: Small-time entrepreneurs are finding it increasingly difficult to get cash to start up new businesses. The new plan calls for creating a special fund to make that easier.

Japan's concerns mounted when rating agency Standards & Poor (S&P) mentioned that the Japanese reform agenda would reduce fiscal flexibility and lead to an increase in Japan's already massive public sector debt. Additionally, S&P said it was keeping its negative outlook on Japan, putting it at risk of a further downgrade at some point, due to the delays in structural reform. The credit rating agency received furious response of the government when it downgraded Japan in April. After three downgrades in two years, S&P now rates Japan's long-term local and foreign currency debt at AA-minus. In wake Japanese Government Bonds (JGBs) dipped only slightly, as Japan is quite safe on this side as Japanese investors hold around 95 per cent of all JGBs. The country has no foreign debt to speak of and boasts the largest pool of private savings in the world, much of it directly or indirectly under the control of government institutions.

Another rating agency Moody's said it had seen no evidence that Japan was effectively tackling the underlying economic problems that put it at risk of a further cut in its credit rating. Moody's, which rates Japan's domestic debt Aa3, said in mid-February it might take the drastic step of cutting Japan's domestic rating by two notches.

After in depth study of Japan's economy, efforts made by the Bank of Japan, and Officials it seems that only boosted local demand and United States' economic recovery can boost Japan's fragile economy. But at the same time Japan needs to overhaul its financial system and explore markets other than the United States.








-0.1 pct

+0.3 pct

GDP (Q2-02)


+0.5 pct

0.0 pct





Industrial Production-Jun


-0.2 pct


Trade Balance (Mln )-Jun




Retail Sales-Jun


-3.7 pct

-3.2 pct

Source: Reuters