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No. 33 — August 25, 2000

Feature Article

PROSPECTS FOR THE JAPANESE ECONOMY:
LOOKING BEYOND THE NEXT QUARTER

Arthur J. Alexander

Summary

Considering time horizons beyond the next quarter or even the coming 12 months, Japan's economy is likely to do well enough, averaging growth in the range of 1 percent to 2 percent a year. Expansion at the higher rate would be an indicator of dynamism, while growth around the lower number would signal stagnation. An economic collapse is just as unlikely as a return to the "miracle" years of the 1960s.

Such projections rest on three empirical observations. First, the variability in growth for rich nations is low, with the average yearly expansion under 2 percent. The track record for economies with a per capita gross domestic product greater than $10,000 in terms of 1985 purchasing power parity runs from 0.2 percent a year to 3.8 percent over 10-year periods. Second, Japan's institutions and practices are those of a rich country. Its economy operates in ways that are close to Anglo-American norms, which are correlated with high levels of per capita GDP.  Third, in terms of resource reallocation across industries, Japan has adapted to shocks and changes in economic life at least as well as the United States. In other words, its economy is not trapped in an obsolete structure.

A satisfactory economic prognosis for Japan is not automatic, however. The difference between the higher and the lower ends of the range of growth estimates is the difference between success and failure — in political as well as in economic terms. If Japan desires to achieve the upper reaches, it will have to deregulate markets and open up the economy at a faster rate than the very real regulatory reform that already has occurred. Prolonging restructuring to accommodate what are perceived to be socially required practices could delay the benefits of these initiatives to the disadvantage of all participants.

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Weekly Review

JAPAN'S NONPERFORMING-LOAN PROBLEM REFUSES TO GO AWAY
--- by Jon Choy

The government's recently formed Financial Services Agency has calculated that the total value of problem loans on the books of Japanese banks and related institutions was slightly higher at the end of FY 1999 than it had been the year before (see JEI Report No. 36B, September 24, 1999). Although the amount of the lowest-quality loans dropped, the figure for notes that carry some risk of default rose far more. However, not all types of lenders experienced an increase in problem loans in the year through March 31, 2000. Banks, in fact, made headway in whittling down their mountain of questionable loans, but bad loans continued to pile up at cooperative financial institutions. The progress achieved by banks, especially the 17 biggest ones, is reassuring. Nonetheless, a cloud of uncertainty still hangs over Japan's lending business.

 

 JAPAN REPORTS BIGGER SPRING CURRENT ACCOUNT SURPLUS
--- by Douglas Ostrom

The current account surplus, the broadest measure of Japan's chronic trade imbalance, rose again in the April-June period after contracting in each of 1999's four quarters, although the increase was a scant 2.3 percent (see Table 1). Moreover, for the second straight quarter, the gain occurred despite a decline in the customs-clearance trade imbalance (see JEI Report No. 30B, August 4, 2000).

 

TOKYO DEALS WITH BUSY DIPLOMATIC AGENDA
--- by Barbara Wanner

August typically is a peak vacation time in the United States and Japan. For the administration of Prime Minister Yoshiro Mori, however, there was no break. The Japanese leader had a packed diplomatic schedule that included an August 18 meeting in Tokyo with Palestinian leader Yasser Arafat and a week-long, four-nation tour of South Asia. That trip began the next day in Bangladesh and wrapped up August 25 in Nepal after stops in Pakistan and India. In the meantime, senior government officials sat down with their North Korean counterparts in Tokyo from August 22 to August 24 to continue negotiations begun in April aimed at normalizing relations between their two countries.

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