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Monday, February 17, 2003

The Economist: Giving Up on Japan?

This weeks Economist piece on Japan almost sounds demoralised and despondent. Are they coming near to throwing the towel in. The article's author doesn't even seem to believe the BoJ will be headed by a deflation targeter any more (they are probably right on this: in fact those like me with a warped sense of humour are begining to imagine the whole Nobuyuki Nakahara affair was 'leaked' to the press to derail any possibility of the candidature ever being presented). Sure, the problems sometimes have a now you see me, now you don't feel about them, but they are real enough even if last weeks official GDP figures confounded all expectations - mine and the Economists alike - by showing that the Japanese economy continued to expand in the final quarter of last year. This news, however, will not make deflation disappear, nor will it take the heat off Japan’s government, which according to the Economist now "appears to be incapable of tackling the country’s deep-seated economic problems".

GOOD news about the Japanese economy is rare these days—and surprising. Most economists had braced themselves for the news that the Japanese economy had shrunk in the final quarter of 2002. So the official figures, released on February 14th and showing that the economy expanded in the October-December quarter, caught people off guard. Growth was modest enough: just 2% at an annual rate. But it means that the economy has now grown for four quarters in succession, and that the country’s fragile recovery is not—yet—over. The figures will provide a welcome breather for the Japanese government, but one likely to be shortlived. The economy’s problems remain daunting and the new data followed hard on the heels of a further slide in business optimism. Moreover, they came just a few days after a new opinion poll showed that the popularity of the prime minister, Junichiro Koizumi, had slumped.

Tackling deflation is a matter of urgency. But even those economists for whom inflation targeting is the preferred solution accept that, by itself, ending deflation will not solve Japan’s problems. What is needed is concerted reform on several fronts—monetary, fiscal and structural. Japanese government debt now exceeds 150% of GDP (more than double the upper limit set by the European Union) and is rising fast. What to some observers seems like an endless series of fiscal-stimulus packages has had almost no economic impact, in part because of a misguided emphasis on wasteful, expensive public-sector construction projects. These have benefited the LDP’s corporate contributors more than the wider economy. Co-ordinated reform seems beyond the current political establishment, and commentators have given up talking about Japan’s last chance to change before being engulfed by a full-blown crisis. The slow speed of the economic decline has meant that the debate within Japan has lacked the sense of urgency that would be needed to overcome opposition to reform. But for Mr Koizumi himself, time might be running out. There is talk of his vulnerability in the LDP leadership election due in September and speculation that he might try to head off a challenge by calling an early general election. What that would do to improve Japan’s miserable economic prospects is far from clear.
Source: The Economist

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