Analysis: US growth raises hopes for Japan

By SHIHOKO GOTO, UPI Senior Business Correspondent  |  April 26, 2002 at 1:48 PM
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WASHINGTON, April 26 (UPI) -- The U.S. economic engine is pushing forward full steam ahead, or it appears at first blush, and the unexpectedly quick turnaround in the world's largest economy is expected to bolster global growth. And Japan is seen by some economists to post some of the biggest gains, thanks to the U.S. rebound.

Others, however, caution that while the Japanese economy could benefit from the recovery in the United States, it is likely to help only in the near-term and actually lead to Japan falling further in a downward spiral in the long run.

The downturn in the U.S. economy had hit Japan particularly hard, as Japan continued to be mired in its 12-year-long economic downturn, whilst the country's exporters saw demand for products overseas shrink rapidly as well.

But with the Commerce Department reporting early Friday that the growth rate for U.S. gross domestic product rose to 5.8 percent in the first quarter, marking the strongest growth since the fourth quarter of 1999, some analysts foresee an economic turnaround in other countries, especially Japan. Yet others point out that Japan trying to export its way out of a recession would be harmful to the country in the long run.

"The U.S. recovery doesn't bode well for Japan in the long-term, " said David Hale, chief global economist at Zurich Financial Services based in Chicago.

Even before the latest GDP figures were released, the Japanese government repeatedly stated that the U.S. economic recovery was particularly helpful in pushing Japanese exports back up again.

In its monthly economic report released earlier this month, Japan's Cabinet Office stated that the economy shows "some bright spots," largely in the export market.

"The outlook remains uncertain as it depends on the pace of the U.S. economic recovery and the speed of structural reforms in our country. But I think the manufacturing sector is recovering and capital spending may increase," said the Bank of Japan's Gov. Masaru Hayami also earlier in April. He added that the economy could pick up by the second half of the current fiscal year beginning September.

Since it became clear earlier this year that the United States was recovering far more quickly from the shock of the Sept. 11 terrorist attacks which took place when the economy was in recession, the greenback has been close to its highest levels over the past ten years. While the dollar's strength has dipped slightly over the past few weeks, as unease about the situation in the Middle East as well as concerns about rising oil prices heightened, the currency still remains relatively high against the Japanese yen.

The weakening of the yen has been openly welcomed by Japanese government officials, who have in recent weeks taken great pains to keep talking down the country's currency. A weaker yen makes Japanese exports cheaper and thus more competitive overseas.

Such an advantageous position for Japanese exporters would certainly have been attacked by the United States only a decade ago, when Japan was seen as a major threat to U.S. industries. Admittedly, the U.S. Chamber of Commerce and the National Association of Purchasing Manufacturers have been pressing the Bush administration to talk down the dollar's rise.

For instance, car manufacturer Mazda Co. and game maker Nintendo Co. both cited last week that improved profit outlooks for the next six months, largely as a result of the weaker yen boosting profitability in the United States.

Yet, U.S. Treasury Secretary Paul O'Neill has maintained that a strong dollar is in the nation's interest, which some analysts have seen as one of the clearest indication that Japan is no longer the economic foe it once was.

That doesn't, however, mean that all nations are equally comfortable with Japan being able to export its way out of a recession. China and South Korea in particular have been frustrated by the continued weakening of the yen, as a sizeable amount of their own exports compete directly with Japanese products in the same overseas markets.

Still, none of the other Group of Seven industrialized nations have protested against the rise in Japanese exports, and in fact, the issue was not even raised at the latest G7 finance ministers' meeting last weekend.

"It is clear that there are downside risks from a weak yen. But a downturn in the Japanese economy overall is far worse," said the Organization for Economic Cooperation and Development's economic research director Val Koromzay.

Still, there is concern that exporting out of a recession is not sustainable, particularly as many economists fear that the U.S. economy is likely to drop considerably in the next quarter, given that the first quarter's rise was largely from a massive overhaul of inventories, often at cost or even at a loss, from the previous year.

Most analysts still broadly agree that fundamental structural reform is critical for Japan to ensure steady growth in the longer term, particularly in clearing out the banking system from its non-performing loans which have been snowballing since the collapse of the real estate and stock market bubble in 1990.

Others, however, are not so pessimistic and see Japan finally emerging out of the abyss once and for all.

"Japan is breaking its deflation spiral," said David Malpass, chief global economist at Bear Stearns. He pointed out that Japan is increasingly dependent on imports itself, and a weaker yen would inevitably mean that foreign companies selling products in Japan would push their prices up in order to make a profit when they repatriate their earnings back to their own countries.

"Already, we are seeing a rise in lumber prices. Agricultural products, too. Pretty soon, we'll see the Microsofts and the Fords of this world hiking their prices too to make a profit in Japan," Malpass said.

By breaking through the deflationary spiral, consumers will have more incentive to buy products before prices go up still further, thereby boosting consumer spending and overall GDP, he added.

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