Strong Q4 Growth in Japan, Doubts Still Persist

Japan's economy has posted better than expected growth in the last three months of 2006. The annual rate of 4.8% recorded in the quarter is the fastest rate in almost three years and has been driven by resurgent consumer spending and capital investment in factories and equipment. Consumption, which makes up more than half of Japan's gross domestic product, rose 1.1% from the previous quarter, rebounding from an equal drop in the July-September period. For the whole of 2006, Japan's GDP grew 2.2%, up from 1.9% in 2005 and down from 2.7% in 2004. Private consumption in the year increased 0.9 percent, down from the 1.6 percent rise in the previous year.

However, doubts still persist regarding strength of the economic recovery. The economy is witnessing its longest expansion since second world war after stagnating in the 1990s. The 5-year expansion seems to be losing steam as growth rates have been stuck in low gear. The Bank of Japan's policy board meets on 20-21 February and the opinion is divided on whether or not it will go for a rate hike.

The country's central bank is waiting for stronger signs of growth and particularly a rise in inflation. The Bank of Japan raised interest rates by a quarter percentage point last July ending the long period of zero rates and would like to raise them further to a more normal level, but signs of strong growth and inflation have proved elusive on one hand and the govenement has shown an inclination for cotinuance of low interest rates, on the other, to keep the economic recovery on track. Meanwhile, Japan's trading partners, notably European nations, have shown concern on the continued weakness of the Japanese curency Yen and would like to see Japanese interest rates being raised to counter this and protect their trade interests.

Related Posts

Bank of Japan's Assessment of Economic & Financial Developments (Jan 2007)

Politics and Economics of Interest Rates (Jan 2007)
Japan Interest Rates on Hold - for Now (Nov 2007)
Japan's Growth Beats Forecasts, Rate Hike May Come Sooner (Nov 2006)

Bank of Japan's assessment of economic & financial developments

The Bank of Japan’s policy board in its two-day meeting that concluded on 18th January decided, in a 6-3 vote, to keep its benchmark interest rate steady at 0.25 percent. This was seen as an apparent about-turn from the recent public remarks made by the bank authorities giving the impression that a rate hike was imminent. The decision has generated intense media scrutiny with concerns that the central bank may have caved in to political pressure to move slowly on monetary tightening. The political establishment has expressed concerns that raising rates too quickly might choke off the nascent recovery, as the economy faces weak consumer spending and no clear signs of inflation.

In its Monthly Report of Recent Economic and Financial Developments January 2007 released on 18th January, BoJ has said that the economic developments so far have deviated slightly downward from the expectations as outlined in the bank’s outlook presented in October 2006, mainly due to weaker-than-expected private consumption. Looking ahead, the bank expects that the economy will develop broadly in line with the outlook, as a virtuous circle of production, income, and spending is likely to remain intact. Here's the text of the report.

Japan's economy is expanding moderately. Exports have continued to increase, while public investment has been on a downtrend. Business fixed investment has continued to increase against the background of high corporate profits. Household income has also continued rising moderately. In this situation, private consumption has been on an increasing trend, although the pace of increase has been only modest. Housing investment has been increasing moderately with some fluctuations. With the rise in demand both at home and abroad, production has also been increasing.

Japan's economy is expected to continue expanding moderately. Exports are expected to continue rising against the background of the expansion of overseas economies. Domestic private demand is likely to continue increasing against the background of high corporate profits and the moderate rise in household income. In light of these increases in demand both at home and abroad, production is also expected to follow an increasing trend. Public investment, meanwhile, is projected to remain on a downtrend.

On the price front, domestic corporate goods prices have recently been somewhat lower than their levels of three months earlier, due to the drop in international commodity prices. The year-on-year rate of change in consumer prices (excluding fresh food) has been on a positive trend.

Domestic corporate goods prices are expected to be somewhat weak or stay flat in the immediate future, due to the drop in international commodity prices. The year-on-year rate of change in consumer prices is projected to continue to follow a positive trend, as the output gap continues to be positive.

As for the financial environment, the environment for corporate finance is accommodative. The issuing environment for CP and corporate bonds is favorable. Also, the lending attitudes of private banks have continued to be accommodative. Credit demand in the private sector has been increasing. Under these circumstances, the amount outstanding of lending by private banks has been increasing. The amount outstanding of CP and corporate bonds issued is slightly below the previous year's level. Funding costs for firms have risen slightly. Meanwhile, the year-on-year rate of change in the money stock is at the 0.0-1.0 percent level. As for developments in financial markets, in the money markets, the overnight call rate has been at around 0.25 percent, and interest rates on term instruments have been around the same level as last month. In the foreign exchange and capital markets, stock prices have risen compared with last month, while the yen's exchange rate against the U.S. dollar has fallen compared with last month. Meanwhile, long-term interest rates have been around the same level as last month.

Developments in Japan's economy have so far deviated slightly downward from the outlook presented in the Outlook for Economic Activity and Prices (the Outlook Report) released in October 2006, mainly due to weaker-than-expected private consumption caused partly by temporary downward pressure stemming from the unfavorable weather conditions. Looking ahead, however, the economy is expected to develop broadly in line with the outlook, as a virtuous circle of production, income, and spending is likely to remain intact. As for prices, domestic corporate goods prices are expected to deviate slightly downward from the expected trajectory, reflecting the drop in crude oil prices. Consumer prices have so far deviated slightly downward from the projection, partly reflecting the drop in crude oil prices, but they are expected to develop broadly in line with the projection.

Japan to Shed its Nuclear Abstinence?

The Japanese government recently commissioned a study to look into the possibility of developing indigenous nuclear warheads, according to a newspaper report. Findings of the study were, however, disappointing as the effort and investment required to produce nuclear warheads have been estimated to be far more than earlier believed.

According to the Sankei Shimbun report, the experts study concluded that it would take at least three to five years and an investment of about ¥200 to 300 billion (US$1.7 to 2.5 billion) for Japan to make a prototype nuclear warhead. This is contrary to the claims made in the wake of North Korean missile and nuclear tests that Japan can quickly produce nuclear weapons if it chooses to, due to its high level of technology and civilian nuclear industry.

Government officials have denied the existence of any such study and maintain that there are no plans to launch a nuclear weapons development programme. As the only nation ever attacked by nuclear weapons, Japan has for decades espoused a policy of not possessing, developing or allowing the introduction of nuclear bombs on its soil. However, the growing security concerns in Japan following North Korea’s intransigent nuclear weapons programme, have more voices calling for a debate on the non-nuclear stance. With the new government led by Shinzo Abe pursuing a nationalist agenda, Japan may finally take the plunge to go nuclear.

Rising nationalism in Japan - history re-visited?

If last decade of the 20th century marked the 'end of history', is the first decade of this century going to be one of ‘history re-visited’? Rising nationalism in Japan is a trend that has largely been ignored in the contemporary world's obsession with the wars being fought in the name of religion. Or, is it too early to call it a trend?

Japan is seeing a revival of nationalist sentiments after half a century of ‘pacifism’ imposed by the US-drafted post-war constitution. After series of visits by the former Prime Minister Koijumi to a controversial war shrine that had evoked angry reactions from neighbours China and South Korea, there are more subtle signs of a shift in national psyche that wants to shed the post-war guilt, build up a sense of patriotism and national pride and have a larger role in international military operations.

Japan’s parliament has enacted a new law upgrading the Defense Agency to a full ministry for the first time since World War II and also passed a new education reform bill that requires schools to teach patriotism.

The upgrading of the Defense Agency under the Cabinet Office to a full ministry gives Japan's generals greater budgetary powers and prestige. This comes in the backdrop of deep concern in the country over North Korean pursuit of missile and nuclear weapons development programme which some observers believe may push Japan to go nuclear sooner or later.

Japan’s military has maintained a low profile under the US-drafted pacifist constitution which prevents Japan from using force to settle international disputes. Tokyo maintains fighting forces only for self-defense and U.S. has some 50,000 troops in Japan under a security alliance. Of late, there has been a discernible shift and Japan seeks a greater role in global military co-operation. Japanese troops have begun participating in international military operations, including in Iraq.

The education reform bill, the first change to Japan's main education law since 1947, calls on schools to “to cultivate an attitude that respects tradition and culture, that loves the nation and homeland.” Critics say this reminds of Japan's war-era education system, in which children were instructed to support the country's imperialist military and sacrifice themselves for the emperor and nation.

Japan's New PM....... What will be new?

He is the country’s youngest prime minister since the Second World War, the first to be born after the war and scion of one of the most powerful political families. As Junichiro Koizumi, one of the most powerful politicians in post-war Japan has passed on the baton to Shinzo Abe, there are curious questions on ‘newness’ and ‘continuity’.

What will “Japan, the beautiful country” be like? What will be the contours of the foreign policy of the country that is all set to play a more assertive role in international affairs – a role that is in contrast to the low profile it has maintained since the end of world war? How will it reconcile the goals of an assertive foreign policy with the need to maintain conducive relations with the neighbours? What direction the bold economic reforms that enabled the economic revival after nearly a decade of stagnation will take? How will Japan reconcile the conflict in its economic interests with the rising economic might of its giant Asian neighbours?

Well, the answers will unfold gradually in future. But, the indications are that the generational change is more about continuity. Abe will pick up from where his predecessor left off – his vision entails a stronger Japan, a revision of the pacifist constitution to permit the country to have full-fledged armed forces, a robust economy and a trimmed-down government, a close alliance with Washington in both trade and security.

Following are some of the key points in the policy platform of the new Prime Minister --

Security & diplomacy - Stronger, Muscular & Assertive

• Revision of Japan's 1947 ‘pacifist’ constitution, which renounces the right to go to war to resolve international disputes and prohibits the maintenance of a military
• Aggressive pursuit of a permanent seat on the U.N. Security Council
• Further strengthening of the US -Japan alliance
• Strategic dialogue with countries such as the United States, India and Australia and European nations that share "common values" with Japan, such as democracy and freedom
• Strengthening trust with China and South Korea
• Promoting an Asia-Pacific community by promoting the World Trade Organization framework and free trade agreements
• Strengthening the role of the Prime Minister's Office in diplomacy and security policies

Economy - Reforms for All

• Rebuild a healthy economy by putting priority on spending reform and work towards comprehensive, mid- to long-term tax reform
• Keep new government bond issuance under 30 trillion yen ($258 billion) for next fiscal year starting in April, a target first set by predecessor Junichiro Koizumi. The target is seen key to cutting Japan's public debt which stands at 150 percent of gross domestic product, the highest ratio in the industrialized world
• Introduce "Second Chance" measures aimed at ensuring that market-based economic reforms do not result in a society of permanent 'winners' and 'losers'
• Revitalise the countryside through private-sector leadership and reform regional governments
• Build a "Japanese style social security model" which includes a simplified pension scheme, sustainable care for the elderly and a better environment for child-rearing

Education - Values and Patriotism

Reform the education system to ensure a high level of education, respect for social values and greater emphasis on patriotism in the school curriculum