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Japan may be in recession right now, but that has not stopped talk that the economy of the rising sun is past its worst; that its lost decade, which became two lost decades, may have mutated into a found decade. Is this true?


If stock markets are to be believed, it may be. The Nikkei closed at a four year high yesterday, and this morning it was up again. The evidence from the surveys is promising too. Take the latest Economy Watchers’ survey, released last Friday. The outlook component has soared. Back in November this index stood at 41.9, it rose to 51.9 in December and then to 56.5 in January.

But then again so what? Japan’s economic woes are more than 20 years old, the fact that stocks are at a four year high, and surveys point to some kind of economic recovery in the months ahead does not suggest we are near the end of 20 years of malaise. For that matter, while the Nikkei has been doing well, it was almost as high back in 2010. On April 5 2010 it closed at 11,339. At the time of writing the index stands at 11,369, so that is not exactly meaningful. Stock indices rise and fall and it may simply be that now we are in one of the up phases. It may be misleading to take a snapshot of Japan’s stock prices at this particular moment.

I would characterise economic forecasts for Japan as being pretty much in the middle of the bull and bear spectrum. Oxford Economics recently forecast that Japan’s GDP rose by 2 per cent in 2012. It forecasts growth of 0.5 per cent this year, 1.7 per cent in 2014, 2.1 per cent in 2015 and 1.2 per cent in 2016. The National Institute of Economics and Social Research (NIESR) has pencilled in growth of 2.1 per cent in 2012, and it forecasts 0.6 per cent expansion this year, and 1.4 per cent in 2014.

Frankly, those forecasts for Japan are nothing startling. It is not so much that Japan is recovering; rather it is that Japan no longer looks that bad relative to the UK and the Eurozone.

Yet the reaction to Shinzo Abe’s victory in the election at the end of last year has been little short of euphoric.

This morning, one of the favourites to be the next Governor of the Bank of Japan, Haruhiko Kuroda, suggested that Japan could enjoy its fastest growth rate in a generation with the right monetary policy. Interviewed on Bloomberg, Mr Kuroda said that it was realistic for the economy to grow at 2 per cent plus this year, and then enjoy that rate of expansion for several years in a row.

The question is: why?

Mr Abe wants the Bank of Japan to be far more proactive in stimulating the economy. It seems inevitable that the central bank will target an inflation rate of 2 per cent. When you think about it, considering that Japan has suffered nigh on 20 years of deflation, it seems a little bit odd that it has taken until now for this policy to be seriously considered.

But can Japan’s central bank really lead the charge? Those who say yes argue that the yen has held back the economy. The mere suggestion that the central bank is set to become more proactive has been enough to force Japan’s currency down. Maybe that is all Japan needs: a cheaper currency born of a central bank that makes the right noises.

But I remain unconvinced. The markets have way too much faith in the ability of central bankers to steer an economy. For that matter, economists have way too much faith in their own ability to define a policy that can save Japan.

Japan’s underlying problems are too many zombie companies – that’s firms that should have gone bust years ago – and demographics. Central bankers cannot do much about either.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


Showing 2 comments

  1. Interesting that optimism in Japan should suddenly improve only when the Japanese economy no longer stands out as being worse than many others.
    After so many false dawns, the Japanese should consider adding a horizon line to the national flag and altering the position of the sun an a monthly basis. Then Japan watcher’s would have more idea if the Nippon Super Star was currently intending to wax or wain.

  2. “The markets have way too much faith in the ability of central bankers to steer an economy.”

    Too much? Maybe. But they need a fair level of ‘faith’, so they have someone to blame when it all goes wrong.

    In this case, it will be an interesting experiement. But if he succeeds, he won’t necessarily get the credit, will he?

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