Japan's Public Debt is $1.7 Trillion

This is true. But what this author failed to note is that their mountain of personal savings translates into a pile of 10,000 yen bills standing 3,806 times taller than Mount Fuji. To fail to mention that is a serious flaw in this report.

September 19, 1996 Is the Recovery Stalling?

Japan's economic recovery appears to be gradually spreading wider, but the tempo of the expansion remains very slow. The Bank of Japan's August survey of business confidence revealed that quite a few companies feel the recovery has stalled. Now, on September 13, the Economic Planning Agency (EPA) has released a report on national income statistics for the second quarter. It reveals that while gross domestic product expanded at a fast annual pace of 12.2 percent in the January-March quarter, it reversed course to a 2.9 percent contraction in annual terms in the April-June quarter (dropping by 0.7 percent on a seasonally adjusted basis from the GDP in the previous quarter). The Nihon Keizai Shimbun reacted to this news with the comment, "consumer spending is still stuck in a low-altitude flight" (September 14).

At this point economists are still arguing over what the latest finding means for the economy's future. It would also appear that no supplementary budget will be enacted this year, since the chances are growing that the National Diet will be dissolved for a general election as soon as it convenes for its autumn session.

Business Confidence Turns for the Worse

On August 28 the Bank of Japan released the results of its latest tankan, a regular survey on the short-term expectations of companies. This survey tracks business confidence using a diffusion index in which zero reflects an equal balance between bullish and bearish outlooks. The August finding was a value of minus 7, 4 points below the previous survey in May. Since this was the first setback to a pattern of returning confidence that began one year ago, all the major dailies took note of it the next day. The Mainichi Shimbun, for instance, commented that "the business recovery shows signs of stalling," while the Nikkei remarked that "movement toward a business recovery is tending to become sluggish."

Behind the dip in confidence lies the slow progress in disposing of excess inventories in such materials industries as steel, textiles, and chemicals, which have been hurt by factors including a slumping semiconductor industry. An editorial in the Nikkei (August 29) opined that "while business is, in overall perspective, in a state of recovery, its self-sustaining power is weak, and a gust of wind might blow it off track. This is a clear reflection of a recovery process that is under heavy pressure from structural adjustments."

The market responded to the tankan finding by bidding down stock prices, short- and long-term interest rates, and the value of the yen. During August the stock market had been regaining its feet, buoyed by the expectation that the Bank of Japan's official discount rate would not, as initially thought, be soon lifted; but the central bank's report triggered a reversal that pushed the Nikkei index on the Tokyo Stock Exchange (TSE) below 20,000 points on September 3 for the first time in five and a half months. The weakness of the TSE is also evident in slow trading, with daily volumes generally failing to reach 300 million yen.

Market interest rates had already been sagging, and the loss of business confidence moved them down further. Generally a downward shift in interest rates gives share prices a lift, but this time, probably because the drop in the diffusion index was sharper than had been expected, the stock market lost ground. All the papers reported on August 29 that market players were now quite confident that the central bank would delay hiking its discount rate, which remains at a record low. The reason for this, the Asahi Shimbun suggested later (September 3), is that "a negative finding on business concerns had turned up."

In early July the yen fell back to 110 to the dollar for the first time in two and one-half years. Subsequently the Japanese currency showed signs of a renewed climb, but a weakening trend again took hold with the release of the tankan. The dollar buying that began with the September U.S. military attacks on Iraq has now reinforced this trend.

More than a Mountain of Public Debt

Back when the yen's rate to the dollar was in the double-digit range, Japan's business circles were calling loudly for the correction of its overvaluation. But the reverse pattern of a falling yen can initiate a vicious circle in which prices climb, real income diminishes, and consumption stagnates. When the yen's slide was picking up speed early in July, all the papers offered analyses on the impact on the economy. For instance, the view of the Mainichi (July 5) was that companies might react by slowing down and skimping on necessary structural adjustments. That is, if the yen weakened to a level well beyond the break-even point, "laxness may spread in corporate structural reforms, postponing the day when the bill falls due."

If the recovery loses its self-sustaining power and the monetary reins are tightened, the market will focus its attention on the possibility of the enactment of a supplementary budget. But while the news of the drop in business confidence has stimulated much talk on the subject, the government leadership is reported to have strengthened its resolve not to introduce additional stimulation this year. Prime Minister Ryutaro Hashimoto has repeatedly stated that the drafting of a supplementary budget for the autumn session of the Diet needs to be approached cautiously. He is, according to the Nikkei (August 28), "eager to reform public finance but not necessarily enthusiastic about stepping up public works." "The chances are growing," the Nikkei reports (September 3), "that the government will opt not to compile a supplementary budget to prop up the economy," and the Mainichi and other papers have echoed this view.

When the current fiscal years draws to a close next March, government debt just in the form of outstanding government bonds will reach 241 trillion yen, a figure so enormous that it translates into a pile of 10,000-yen bills standing about 637 times taller than Mount Fuji. When other forms of public debt including the bonds issued by local governments are factored in, the red ink swells to 442 trillion yen. Since additional spending would add to the size of this debt, placing public finance in an even tighter pinch, many government leaders want to avoid a supplementary budget unless it is absolutely essential.

But this is not the view of the Liberal Democratic Party, the largest of the ruling coalition's partners. All the papers reported that when the party's executives met on September 3, they agreed on taking a favorable approach to the preparation of a supplementary budget. Reports the Asahi (September 4), "the majority view was that a supplementary budget is necessary for stimulating business, funding reconstruction from the Kobe earthquake, and fighting the food poisoning from the O-157 colon bacillus."

In response, Prime Minister Hashimoto and his minister of finance, Wataru Kubo, who is also reluctant to see a supplementary budget enacted, have stated that they will reach a final decision after studying the latest data, including the national income statistics for the second quarter.

Commenting on its findings, the EPA pointed out that even though growth turned negative in the second quarter, the economy still managed to expand at an annual rate of 6.4 percent for the January-June term as a whole. Its opinion continues to be that a gentle recovery is in progress.

In this situation, all the papers including the Nikkei came out with reports in the morning of September 14 predicting that the government and the ruling parties will dissolve the lower house, hold an election for it in October, and do without a supplementary budget at this time.