Recovery needs new markets

Takamitsu SAWA (Professor, Kyoto University)

The Japanese economy is finally showing signs of recovery after remaining in the doldrums since May 1991, according to media reports. For example, stock prices are rising, corporate performance is improving, exports are expanding and capital spending is growing.

The stock market mirrors conditions in the real economy. On April 28, 2003, the Nikkei average on the Tokyo Stock Exchange closed at a postbubble low of 7,608, down 80 percent from the high of 38,916 at the end of 1989. Last year's plunge was triggered by the collapse on Wall Street after the Iraq war broke out. But there were no signs of impending deterioration in Japan's economy.

The Bush administration, after taking office in 2001, pushed unilateralism to impose U.S. principles on the world. Its willingness to use force to control opposition contrasted with the Clinton administration's promotion of international cooperation and economic stability. Some analysts say the Bush administration derives its strength from the Pentagon and the oil industry, while the Clinton administration was backed by the Treasury Department and the financial industry. This view is credible.

With the world becoming destabilized, U.S. hedge funds, which had amassed huge profits in the 1990s through short-term capital investment, had trouble finding targets for low-risk, high-return investment for short-term capital.

In April 2003, hedge-fund operators started buying Japanese shares, believing that they were undervalued and would make substantial gains in the months ahead. They noted that Japanese manufacturing technology was excellent, that steady progress was being made in the disposal of banks' bad loans and that corporate performance was improving. Foreign investors switched to net buying in the third week of the month -- just as the average hit a record low. Stock prices rose, and on April 28 this year the Nikkei average hit 12,064, up 59 percent from a year earlier.

The stock boom produced latent profits for shares held by companies, pushed up their pretax profits and expanded banks' own capital. It also brought handsome profits to foreign investors who benefited from a rise in the yen's value against the dollar from 119 to 109.

It was in 1999 that net buying by foreign investors hit an annual record of 9 trillion yen -- after the Nikkei average had dropped to the then-postbubble low of 13,842 at the end of 1998. Mass buying by foreign investors pushed up the average to 20,337 at the end of March 2000. Then foreign investors, quick to seize an opportunity, turned to selling, posting net sales of 2 trillion yen in 2000, and got away with big profits.

Similar events could recur. Past experience shows that foreign investors expect the Nikkei average's interim high to be at around 15,000 -- without taking into account economic fluctuations. If full economic recovery starts, foreign investors could expect a high of 20,000. This much is certain:

Economic recovery will not benefit all companies; there will be winners and losers.

Job cuts based on information technology will be key to improvement in corporate performance. The unemployment rate is unlikely to fall.

Introduction of new mass-market products is the only way to activate consumer spending.

We should not be swayed by groundless optimism expressed by irresponsible economists. Real economic recovery requires technical innovation by individuals, companies and the government.

Digital cameras, ultra-thin TV sets and DVD recorders are said to be part of a new generation of major consumer electronics products. These products, however, replace old products, just as the digital camera replaces the film-based camera. They are unlikely to lead to a sharp net gain in consumer spending.

The three status symbols of Japanese society in the late 1950s -- black-and-white TVs, refrigerators and washing machines -- created new consumer markets and served as the engines of the high-growth era. In recent years, PCs, car-navigation systems and automobile phones were new products that created new markets. Development of revolutionary consumer products is necessary to stimulate economic recovery.

(This article appeared in the May 31, 2004 issue of The Japan Times)