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The New Bull In Tokyo


Since Japan's economy fell apart 14 years ago, attempts to stimulate a recovery have repeatedly failed, and the country has continued to struggle with banking problems, persistent deflation and consumer apathy. After years of restructuring and "pork barrel" government spending, which only stimulated brief (but profitable) rallies, there are finally signs that this time is different. Is it possible the upturn that began in 2003 could mark an end to the long, slow decline for this major economic power? Let's take a look at the latest evidence.

Growth is picking up in Japan, which just experienced two consecutive quarters of the fastest economic growth in 13 years. In the first quarter of 2004, gross domestic product increased at an annualized rate of 5.6%. In a sign that banking problems may be easing, three of the four largest banks in Japan reported profits for the year ended in March, after writing off the equivalent of billions of dollars in losses over the last two years. So far, this recovery has relied heavily on increasing exports--primarily to China--with benefits limited to Japan's large manufacturers. According to the latest Tankan survey, which provides a gauge of Japanese business sentiment, the initial optimism among these large companies is spreading. Smaller nonmanufacturing firms are reporting the steepest upturn in sentiment since 1999.

In addition, a recent report from the Economic Cycle Research Institute, which has a remarkable record for spotting turning points in Japan's economic cycles, points out that in March, Japan saw the strongest upswing in inflation pressures in 16 years (as measured by ECRI's Japanese Future Inflation Gauge). Reinflation is actually good news for a country that has been fighting deflation for the past five years. Most important: If this upturn is to be sustainable, the domestic sector must participate in the recovery.

Household consumption is now growing at a rate not seen since 1992 (except for a purchasing spree in 1997, when consumers tried to avoid a pending increase in the value added tax). Although risks remain, these factors paint a compelling picture for Japan...