RIM January 1999, No.42
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Economic Outlook of Japan for FY1999
Sakura Institute of Research, Inc.
Economic Research Dept.
1. Economic Trends in FY1998
The main factor of the recession in FY1997 was a decrease inpersonal consumption caused by a sharp increase in tax burden. As themonths wore into FY1998, businesses, especially small- and medium-sized companies, cut back on their equipment investment in earnest, giving an additional downward push to the already weakening economy. Recession-caused decrease in demand has intensified downward pressure on prices, which, in combination with the weaker demand, eroded corporate earnings substantially. In the second half, the decrease of equipment investment by small- and medium-sized companies will be eased, but cutbacks will spread to large companies. As a result, an overall decrease in equipment investment will continue well into the second half.
Personal consumption also is seen declining continuously, given the deteriorating job market and dwindling incomes. Worse yet, contribution to economic growth from foreign demands, which had been a positive factor propping up the sagging economy, is likely to fade away in the second half of FY1998, on account of a slowdown in foreign economies.
On the other hand, public investment will show a massive increase in the second half of the fiscal year, financed by the Comprehensive Economic Measures announced in April 1998, and help brake the downward slide in GDP.
All things considered, real economic growth rate will mark a substantial decrease from the previous fiscal year, at -2.4% in FY1998 (Fig. 1).
2. Policy Trends
Concerned about the precipitous deterioration of the economic activity, the government and the Bank of Japan have come up with a series of fiscal and monetary stimulus measures in the second half of FY1998.
On the fiscal front, the government announced on November 16 a 24 trillion yen (US$200 billion at the rate of 120 yen to the U.S. dollar) Emergency Economic Package to finance public-works projects and income tax cuts. It includes 8.1 trillion yen ($67.5 billion) to be spent for building social infrastructure, as well as 4 trillion yen ($33.3 billion) to finance a 15%-point cut in the maximum income tax rate (income tax + inhabitants tax) from 65% to 50%, and 2.3 trillion yen ($19.1 billion) to finance a 5.49%-point cut in the effective corporate tax rate from 46.36% to 40.87%. In addition, the government is expected to implement, in late FY1998, its controversial plan to distribute merchandise coupons worth 700 billion yen ($5.83 billion) among households rearing children under the age of 15 and needy elders.
On the monetary front, the Bank of Japan on September 9 lowered the uncollaterized overnight call rate target to "around 0.25% a year" from "a level slightly below the official discount rate (0.5%)." At the same time, it suggested that it will provide more ample funds, if judged necessary, to maintain the stability of the financial market. Also, the passage of a bill for an Early Normalization of Banking Functions in October has opened the way for injecting public funds into the banking system to accelerate the normalization of its function. Furthermore, the Bank of Japan announced on November 13 that it will implement measures such as establishing a temporary lending facility to support financing activities of companies.
3. Trends of the World Economy
Meanwhile, issues of concern about the health of the world economy have surfaced one after another in recent months. For one thing, the turmoil in the emerging markets, which was triggered by the currency crisis that erupted in Thailand in July 1997, not only has swept through other Asian countries but also has hit Russia and Brazil in 1998, wreaking havoc in the financial markets of many countries. It also cast a shadow over the U.S. economy, which had enjoyed a long spell of economic expansion. Concerned about the possibility of a credit contraction in the United States, the Federal Reserve Board (FRB) had eased its credit reins for three consecutive months from September. Owing to the timeliness of the measure the FRB had taken, the U.S. economy seems to have escaped the danger of a recession, but may not be able to avert a slowdown.
Meanwhile, in Asia, where was the epicenter of the recent currency crisis, the economic downturn in some of the countries has been braked at last. The Asian economies as a whole, however, may turn only slightly upward in 1999. The long-feared possibility of a devaluation of the Chinese currency, renminbi, has diminished due to the recent weakening of the U.S. dollar, to which the renminbi is linked.
The European economies, whose currencies are to be unified shortly, are also expected to slow down a little, and consequently, the world economy as a whole is expected to drift toward a slowdown.
4. Economic Outlook in FY1999
A general outlook of FY1999 by demand item shows that personal consumption is not likely to pick up and turn upward any time soon, as the buoying effect of the proposed income tax cuts will be canceled out by a decrease in income. Equipment investment will continue to decrease and mark -4.7%, and housing investment will barely manage to stay level with the FY1998 result.
On the other hand, the Emergency Economic Package announced in November 1998 will boost public investment further, by 8.0% in FY1999.
As the yen rate is expected to decline for the time being, Japanese products will regain its competitiveness on the world markets, but since the world economy is slowing down, Japan's net exports are unlikely to grow strong enough to make any significant contribution to the economic growth.
On balance, the real economic growth rate will be -0.3% in FY1999 (Fig. 1).
5. Where Will the Economy Go from Here?
As falloffs in final demand have been arrested, decreases in industrial production have become less precipitous. Since changes occurring in industrial production has a strong correlation with the economic trend, they are critical in judging future movement in the economy.
While final demand stopped falling off as noted above, inventory-sales ratio still remains at a high level. Given these facts, it will take some more time before industrial production turns upward. As a result, the economy is not expected to start following a recovery trend before FY1999.
The buoying effect of the public investment is expected to underpin the economy in the first half of FY1999 (April-September). However, unless private demand picks up on its own in the second half, the economy could deteriorate again. In such cases, pressure for another fiscal stimulus may grow; but, by doing so, the government will not be able to escape tackling a fiscal reform in and after FY2000, trapped in a further difficult situation with little financial elbowroom to maneuver.
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