JAPAN'S JUNKIE ECONOMY IS IN NEED OF ANOTHER FIX By Paul Abrahams in Tokyo
Japan may be heading for another recession in spite of the efforts made by the government to prop up the nation's economy.
On Monday it emerged that the economy contracted 1 per cent in the third quarter. Indicators suggest economic performance will be similarly dismal in the fourth.
The latest downturn, coming after only two quarters of growth, raises the question of whether Japan is becoming something of an economic junkie, increasingly dependent on injections of government spending. Without regular fiscal fixes, it falls into recession.
The direct effects of the last economic stimulus package, announced with much fanfare a year ago by Keizo Obuchi, the Japanese prime minister, fell out of the system last quarter. Public investment immediately fell 8.5 per cent in the latest quarter compared with the previous three months.
The hope, as in the past, was that the private sector - representing more than 60 per cent of the economy - would pick up the slack.
But every component of domestic demand was negative in the third quarter. Private consumption was down 0.3 per cent. Wages have been falling - down 0.9 per cent year on year - and consumers have been spending a smaller proportion of their shrinking salaries. Housing investment also fell by 3.2 per cent when a government-funded scheme to subsidise mortgages ended.
Capital investment was negative, and much worse than expected, down 2.1 per cent. With end-user demand so weak and capacity utilisation so low, there seems little point in companies buying new plant and equipment.
Besides, corporate profitability is so poor that many companies cannot afford to invest, or are struggling to obtain finance as banks contract their loan portfolios.
The only bright spot was net exports. A 4.7 per cent quarter on quarter increase overshadowed a 2.4 increase in imports.
Overall, however, prospects look similarly bleak for the current quarter. In October, wage-earner incomes contracted again and consumers' inclination to spend fell yet further. Housing starts also declined. Industrial output dropped, capital spending remained weak and net exports could be flat, hindered by the yen's recent strength.
"We could avoid a technical recession, but it's not guaranteed," concedes Peter Morgan, economist at HSBC in Tokyo.
So how is it possible for the economy to be so weak given the amount of money that has been pumped into it? Since August 1992 the government has announced 10 supplementary spending packages worth ¥120,000bn ($84.3bn).
The problem is not the quantity of the spending, but its quality. Decisions about supplementary spending are often based on political rather than economic considerations and many projects add little to long term economic growth.
Take the island of Ikitsuki, off Kyushu in western Japan. This community of just 7,000 inhabitants has a brand new bridge linking it to its neighbouring island and three ports - one newly constructed, and almost empty.
It is far from clear how long Japan can afford to continue paying for its fiscal spending addiction. Gross debt is already 130 per cent of gross domestic product, the worst in the Organisation for Economic Cooperation and Development, and rising fast.
But any detoxification is likely to painful, involving forced lay-offs and much higher unemployment, at least in the short-term, to build the foundations for more sustainable growth.
The government remains moderately optimistic. Taichi Sakaiya, head of its economic planning agency, said on Monday he was confident the government's official growth target of 0.6 per cent for the year to March would be met.
"I am not so pessimistic about the January-March economy," he said.
Of course, the government's latest stimulus package, worth ¥18,000bn, should kick in early in the new year.