Can We See the Light Through the Tunnel?

“The Economist” once praised Japan in the 1960s as the miracle of the rising sun. I used to be in the situation of having to explain why the Japanese economy behaved so well. However, recently Japan is referred to as the country where the sun also sets. Japan appears now in the twilight. In my office, I hear almost every day some new announcement of business statistics, and, during the past year, most of the time I was discouraged by the news. Since very recently, I am slightly more encouraged than before by the recovery of the U.S. economy and a few hopeful signals in the Japanese economy. The hope comes from the recovery of the U.S. economy and the progress of inventory adjustment. Production and export have some optimistic signs, but consumption and employment pictures are still dismal.

I will explain today why the Japanese economy has been struggling for such a long time and what can be done to find the way out of this situation. Let me start the discussion by mentioning some basic difficulties that Japan faces now.

(1) The Japanese economy has structural problems. The real wages are so high that Japanese manufacturing industries are motivated to move out, leading to the “hollowing of Japanese industries.”

(2) An overhang of the non-performing debt haunts the Japanese economy. The debt was generated as the result of mismanagement of businesses and policies during, as well as after, the bubble period, and is still growing because of continuing deflation.

(3) The price level is steadily declining. Asset prices, like land prices and stock prices, went down quite rapidly. The Nikkei stock average once fell about 75% from the peak (compare with the 85% decline in the US market during the Great Depression). Land price index went down 55% and still keeps declining.

(4) The unemployment rate was a high figure of 5.3 percent last month. (Japan used to enjoy the low unemployment rate around 2 to 3 percent during the high growth period.) The real GDP during the 2nd quarter (April-June) declined with the annual rate of 4.8 percent, during the 3rd quarter declined by 2.0 percent, and in the last quarter of 2001 declined 4.8 percent. It is expected that the estimate of real growth for the fiscal 2001 (ending in March 2002) could be negative, around minus one percent.