Japan: Economic and Policy Developments
Author: International Monetary Fund
Publication Date:
02 Nov 2000
eISBN:
9781451820546
Language:
English
Keywords:
ISCR; CR; bank; investment; business investment; Japan; deregulation; labor market; fiscal policy; fourth quarter; inventory investment; seasonal adjustment procedure; Private consumption; Private investment; Public investment spending; Consumer price indexes
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Fiscal policy has been strongly expansionary for most of the past decade in Japan. The resulting strain on public finances has made stimulus policies more difficult to maintain. The stance of monetary policy has remained unchanged over the past year. Further progress in resolving banking problems is essential given the plan to remove blanket deposit insurance in April 2002 and to lay the foundation for sustained growth. The paper discusses recent developments in the field of structural reform and deregulation in Japan.

Abstract

Fiscal policy has been strongly expansionary for most of the past decade in Japan. The resulting strain on public finances has made stimulus policies more difficult to maintain. The stance of monetary policy has remained unchanged over the past year. Further progress in resolving banking problems is essential given the plan to remove blanket deposit insurance in April 2002 and to lay the foundation for sustained growth. The paper discusses recent developments in the field of structural reform and deregulation in Japan.

Japan: Selected Economic Indicators, 1993–2001

Nominal GDP: US$4,347 billion (1999)

Population: 126.6 million (1999)

GDP per capita: US$34,334 (1999)

Quota: SDR 8,241.5 million

article image
Sources: Nikkei Telecom; and staff estimates and projections as of July 12, 2000.

Contribution to GDP growth.

Including social security, excluding bank support.

Based on normalized unit labor costs; 1990=100.

June 2000.

April 2000.

July 12, 2000.

I. Real Sector Developments1

A. Japan in the 1990s: Stagnation and Volatility

1. The Japanese economy is slowly emerging from its worst post-war economic crisis. After growing at about 4 percent per annum in the 1980s, economic growth slowed to about 1½ percent in the 1990s, a performance that also compares unfavorably from an international perspective (Figure I.1). Moreover, Japan has had five technical recessions (defined as two or more quarters of consecutive output declines) in this period—in 1992, 1993/94,1995/96,1997/98, and most recently, in the second half of 1999. While GDP increased sharply by 2.4 percent in the first quarter of 2000 (about 10 percent on an annualized basis), the recovery remains uneven and fragile. This chapter provides a brief overview of the causes of the poor economic performance in the 1990s, and a more detailed analysis of recent real sector developments.

Figure I.1.
Figure I.1.

Japan: Growth and Volatility Comparisons

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A001

Sources: IMF. CEI Database; Nikkei Telecom; and staff calculations.

2. The trigger for the economic problems in the 1990s was the asset price collapse in 1990–91, although the persistence of weak performance was due to the impact of the asset price collapse on the banking system and on business investment. The bubble in Japanese stock prices burst in 1990. By mid-1992, equity prices had fallen by about 60 percent, and are currently still less than 50 percent of peak values. Land prices began their downward spiral a year after stock prices plunged; while the fall in land prices was initially less precipitous than in equity prices, the decline continued inexorably throughout the 1990s, and land prices are currently less than 40 percent of peak levels. The asset price collapse created problems for the banking system by impairing loan collateral, and also by eroding bank capital (until recently, Japanese banks counted part of their “hidden” capital gains on equity ownership as bank capital). Business investment slumped steeply in Japan in the 1990s as the large corporate sector found equity financing of investment expensive, and small and medium sized enterprises that had a greater dependence on bank lending faced a credit crunch due to the fragile state of the banking system. Moreover, the excess capital that many firms had accumulated from years of overinvestment in the 1980s drastically curtailed incentives to augment capital stocks. The slump in business investment—which fell from about 20 percent of GDP in 1990 to about 16 percent in 1999—has been one of the major contributors to the stagnation of the Japanese economy in the 1990s.2

3. While considerable attention has been directed toward understanding the causes of slow growth in Japan in the 1990s, an important development that has received less attention is the massive increase in the volatility of Japanese output during this period. Volatility, as measured by the coefficient of variation of quarterly GDP, rose almost six fold in Japan, from 0.65 in the 1980s to 3.75 in the 1990s. To put this development in perspective, volatility of output rose only marginally in Germany in the 1990s despite the economic disruptions caused by reunification, while volatility actually fell significantly in the United States (see Figure I.1). Why has volatility of output increased so dramatically in Japan in the 1990s, whereas it has fallen in most other G7 countries during this period? The answer is a complex one, combining aspects of the way policies were formulated and implemented in Japan, the effects of the financial panics induced by the banking crisis during 1997–98, and technical factors relating to the measurement of the national accounts statistics.

4. Activist macro policies may have, paradoxically, played a role in accentuating output volatility in Japan. Recent research indicates that the systematic implementation of stabilization policies in the large industrial countries in the post-war period had the effect of reducing output volatility (in relation to the pre-war period) by muting the effects of the various demand and supply shocks to which economies are periodically subject.3 As in the case of other countries, stabilization policies in Japan also proved successful in reducing output volatility in the post-war period. The structural break that appears to have occurred in the 1990s appears related in part to the inconsistent manner in which macro policies were pursued in the 1990s—particularly with fiscal policy alternating between expansionary and contractionary phases—leading to exacerbated output volatility. The volatility of public investment—an important ingredient of activist fiscal policy in the 1990s—contributed directly to increasing the volatility of output. Moreover, the use of temporary tax cuts, that were periodically reversed only to be reintroduced later, may have contributed to increased output volatility, not only through its direct effects on demand, but also indirectly, by making the economic environment a more uncertain one. The preannounced hike in the consumption tax in April 1997 contributed importantly to volatility by generating intertemporal substitution of consumption.

5. The failure to resolve banking problems in a timely manner also appears to have contributed to increased output volatility in the 1990s. It has been argued that the strengthening of prudential regulations in the banking systems of industrial countries in the post-war period dramatically reduced the incidence of financial panics and contributed to the reduction in output volatility.4 While banking problems have periodically cropped up in many industrial countries during this period, very few of them have had to grapple with a banking crisis of the magnitude that Japan faced in the 1990s, with the possible exception of the Nordic countries during 1991–93. While the Nordic countries were relatively quick to resolve their banking problems, Japan allowed them to fester. The failures of some prominent banks and brokerages during 1997–98 had the effect of undercutting confidence and accentuating the volatility of private consumption. Precautionary savings rose sharply in response to the financial turmoil that accompanied the bank failures. As the authorities gradually, but systematically, adopted measures to resolve the banking problems, the precautionary savings began to be unwound during the first half of 1999 (contributing in part to the surge in private consumption during this period—discussed in more detail below). Given that private consumption constitutes about ⅔ of GDP, these factors also contributed to the high volatility of output during this period.

6. Swings in the exchange value of the yen and external demand shocks (associated in part with the Asian crisis) also contributed to output volatility. A sustained appreciation in the first half of the 1990s pushed the yen to a high of ¥80/$ in April 1995. It then depreciated steeply to reach a low of about ¥147/$ in August 1998, only to strengthen again through 1999 to its current value of ¥107/$. These large swings in the exchange value of the yen—which appear to have reflected internal market dynamics as much as cyclical developments in the economy—have made the external sector’s contribution to growth highly volatile. For instance, the external sector’s contribution to growth moved from a negative ¼ percentage point in 1994 to about 1½ percentage points in 1997 as the yen weakened. With the onset of the Asian crisis, and the strengthening of the yen in late 1998, the external sector’s contribution moved back to a negative contribution of about a ¼ percentage point in 1999.

7. Measurement problems connected with compiling and calculating Japanese national accounts have contributed both to the high volatility of GDP in the 1990s and have also given misleading signals about the true state of the economy. The data problems appear to have been particularly pronounced for private consumption and public investment. Measurement problems connected with private consumption have had a bearing on output volatility in the 1990s in a variety of ways. First, seasonal adjustment procedures have not taken adequate account of structural shifts in the pattern of private consumption in recent years—particularly the shift that has occurred between the last quarter and the first quarter of the following year. This is related in large part to changes in the pattern of bonus payments—a part of the traditional December bonuses has tended in recent years to spill over into the January of the subsequent year. As a result, in recent years private consumption as defined in the national accounts has fallen sharply in the last quarter of the year and risen sharply in the first quarter of the subsequent year. The failure of seasonal adjustment procedures to take account of leap year effects has also contributed to this volatility, for example in the first quarter of 2000.

8. Sampling problems connected with computing private consumption on a national accounts basis also appear to have contributed to volatility and made it difficult to assess the true strength of the economy. The Household Survey, which is used as the main input for computing private consumption, excludes single-person households, while the proxy measure used to capture the consumption of single-person households tends to underweight them. Since this segment of the household sector has increased its spending rapidly in recent years, the national accounts are likely to have understated recent trends in private consumption; this may go some way toward explaining the recent discrepancies between the stronger supply-side data and the weaker demand-side data—the quarterly national accounts are calculated almost exclusively from the expenditure side.

9. Measurement problems have also affected public investment. The EPA uses annual information from the budget, taking into account any revisions due to supplementary budgets. To gauge the quarterly path, the annual figure is allocated based on statistics on public construction works in progress. This procedure may contribute to volatility in the quarterly series, however, because the estimate from the budget may provide a misleading picture for public investment in the year as a whole (for example, if local authorities are financially constrained and implement fewer projects than envisaged in the budget). This has certainly been a feature of the track of public investment in recent years, when the actual level of public construction has at times been lower than initially programmed (reflecting the weak financial position of local governments), making the task of forecasting public investment a difficult one.5

10. High output volatility makes forecasting an even more difficult task in Japan than it is in other countries. A recent study of the private sector forecasting performance in the 1990s found that the forecasting record has been quite dismal for literally all countries— both industrial and developing.6 Only two of the 60 recessions that occurred across both industrial and developing countries during this period were predicted a year in advance. Two thirds remained still undetected in the April of the year in which the recession occurred. The forecasts for Japan have been even more off the mark than those for other industrial countries. Among the G3, for instance, the forecast errors for Japan in the 1990s have been almost twice as large as those for Germany and the United States (Figure I.2). Moreover, there has been a much greater variation among forecasters in the Consensus Forecast in their predictions of Japanese output growth than is typically the case with output forecasts in other industrial countries. The standard deviation of the year ahead GDP predictions made by the various forecasters in April of each year was about 50 percent higher for Japan than for either the United States or Germany. The standard deviation of the same year’s output projections made in April was, however, even higher (relatively) in Japan—being about twice as large as in the United States and Germany (see Figure I.2).

Figure I.2.
Figure I.2.

Japan: Forecast Errors and Variability of Forecasters, 1991–99

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A001

Sources: Consensus Economics Inc., Asia Pacific Consensus forecasts; and staff calculations.

11. The greater dispersion among forecasters of the Japanese economy may also be due to the poorer quality of the information on the basis of which the forecasts have to be made as well as greater underlying volatility. The fact that the variability of the same year’s predictions by Japanese forecasters is much larger (relative to the other G3) than is the year ahead forecast is testimony to the difficulties connected with procuring timely and reliable data—for instance, the quarterly national accounts in Japan are released about a full month after they come out in the United States. Given the delays as well as the ambiguities involved in interpreting Japanese data, forecasters tend to be split as to whether data movements reflect genuine filming points or are transient in nature.

12. The authorities have recently taken a number of steps to address some of the shortcomings with Japanese data. The Economic Planning Agency (EPA) is reviewing the seasonal adjustment procedures used for computing the quarterly national accounts. There are also plans to improve the reliability of private consumption data by expanding the coverage of single person households in surveys that are used as inputs for compiling private consumption on a national accounts basis. Beginning in the first quarter of 1999, the EPA began releasing “flash estimates” (calculated approximately a month after the end of the relevant quarter) along with the preliminary estimates of GDP—released usually about 70 days after the end of the relevant quarter—as a prelude to the advance release of the “flash estimates” in the future. This exercise, intended as a transitional step toward improving the timeliness of Japanese data, indicated the presence of a large discrepancy between the flash estimates and the preliminary estimates, particularly in the case of gross capital formation. In order to avoid confusion in the markets, the EPA is exploring ways of improving the “flash estimates” before they are released in advance on a regular basis to the public. To improve transparency and help the public have a better understanding of Japanese data, the EPA has made available a document explaining the methodology used for compiling the national accounts.

B. Corporate Restructuring and the Supply Side

13. The framework for corporate restructuring has been strengthened recently, and this is beginning to be reflected in actual corporate restructuring, although the process is still in its early phases. A whole array of laws and practices governing the operation of businesses has recently been modified to improve efficiency and transparency, including: the introduction of laws to provide tax and other incentives for companies to shed excess capital and labor (Industrial Revitalization Law); changes in laws and practices to facilitate rehabilitation of highly indebted or nearly bankrupt firms, mergers and acquisitions, and spin-offs (Commercial Code changes); and changes in accounting practices that require firms to present financial accounts on a consolidated basis and to mark-to-market their assets. There have also been deregulation initiatives to improve the access of smaller firms to markets that have in the past been implicitly or explicitly protected, and also to enlarge their access to financing—the recent openings of the Mothers Stock Exchange in Tokyo and Nasdaq Japan in Osaka are examples of such attempts to tap organized financing for new ventures in high-tech industries. These initiatives to promote greater transparency and competitiveness have started to gradually transform the way that businesses are run and, together with cyclical factors, are beginning to have effects in improving the profitability of firms.

14. Financial services and information technology products have grown relatively rapidly during the past year, and there has been a modest pick-up in profitability. After lagging behind manufacturing for a number of years, the service sector has grown relatively rapidly in recent years. Deregulation initiatives in transport and communications, and the “Big Bang’s” effects in opening up of the financial sector to foreign firms and mergers and acquisitions have led to a rapid growth of these sectors during the past two years (Figure I.3). In particular, information technology products’ contribution to industrial growth in recent months has been significant—about one-third—although the robust performance of this sector cannot be attributed to the effects of corporate restructuring alone, since this phenomenon is part of a more general global trend (Figure I.4). Nevertheless, the deregulation initiatives have played an important role in providing the foundations for a rapid growth of the information technology sector in Japan.

Figure I.3.
Figure I.3.

Japan: All Industry Activity Index

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A001

Source: CEIC database.
Figure I.4.
Figure I.4.

Japan: Industrial Production and Information Technology

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A001

Source: Ministry of International Trade and industry.1/ Contribution to growth of industrial production.

15. Corporate restructuring in Japan, nevertheless, has still some way to go. Debt levels and labor costs are still high by historical standards, and the return on assets, despite having increased in recent months, is still well below the levels achieved in the past (Figure I.5). Indeed, corporate data suggest that the recent profit gains have been mainly related to the more efficient use of inputs—squeezing suppliers—rather than from the reduction of labor costs. To accelerate the process of corporate restructuring, the recent reforms need to be complemented by tax and other incentives to facilitate mergers and spin-offs and encourage labor mobility.

Figure I.5.
Figure I.5.

Japan: Corporate Survey, 1985–2000 1/

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A001

Source: Ministry of Finance: and staff calculations.1/ Seasonally adjusted data.

The Labor Market

16. Despite the marked slowing of the Japanese economy in the 1990s, unemployment rose gradually during the first half of the decade, but picked up sharply in recent years. The rapid increase in unemployment in recent years, to almost 5 percent recently, has been driven in large part by the decisions of large firms—which had traditionally been the main practitioners of life time employment—to shed labor, as economic conditions worsened considerably. Employment fell sharply in the first half of 1999, particularly in large enterprises, and a sharper increase in unemployment during this period was avoided only on account of discouraged workers leaving the labor force (Figure I.6). The employment situation, however, improved in the second half of 1999, as employment in services rose. Employment has fallen again this year—in part due to the particularly sharp decline in manufacturing employment, which fell by almost 2½ percent in the first five months of this year, as corporate restructuring moved ahead.

Figure I.6.
Figure I.6.

Japan: Labor Market Conditions, 1990–2000

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A001

Sources: Nikkei Telecom; and WEFA.

17. With restructuring getting underway, there is evidence emerging of growing mismatches in the labor market. Despite the severe state in the labor market, the ratio of job offers to job seekers has risen from a low of 0.46 in May 1999 to 0.56 in April 2000. The increase in the ratio of new job offers to job seekers has been sharper—from 0.79 in May 1999 to 1.02 in April 2000—indicating that employers in certain types of activities are finding it difficult to recruit suitably qualified workers. In this regard, rising youth unemployment as well as diminished employment prospects for elderly workers have contributed to the increase in structural unemployment. Older workers tend in general not to match the job requirements of the newer industries; while mismatches between skills and job requirements have also driven the increase in youth unemployment, there also appears to be some evidence recently of an increase in voluntary unemployment in the case of young people.7

18. The deteriorating labor market situation has taken its toll on earnings, although earnings appear to be stabilizing in recent months. Earnings grew on average by about 1¾ percent during 1991–97. The deteriorating labor market situation during 1998–99 had an adverse impact on earnings, which fell by about 1 percent in 1998, and by 3¼ percent in 1999. The steep decline in earnings in 1999 was accounted in large part by a decline in overtime pay, as well as in bonuses, which are tied to past corporate profits. Earnings have been falling less steeply in recent months, as an increase in overtime pay has partly compensated for the decline in scheduled earnings (see Figure I.6).

Prices

19. Prices, as measured by the consumer price index, show continuing deflationary pressures. Consumer price inflation fell sharply in the immediate aftermath of the collapse of the asset price bubble, but remained essentially flat up until mid-1999, once the effects of the sales tax hike in 1997 are excluded. Underlying inflation, which excludes the prices of perishable food and energy from the CPI, has broadly tracked the trends in the overall CPI (Figure I.7). Both the CPI and underlying CPI indicate that deflationary pressures intensified in the economy from late 1999—the underlying CPI’s decline by about ½ percent on a 12-month basis in April 2000 was its largest fall in over a decade. The decline in the GDP deflator by about 1¾ percent in the first quarter of 2000 is also its largest fall in over a decade. It should be recognized that measurement biases in calculating the CPI (estimated to be overstating inflation by about 1 percent) imply that deflationary pressures may be somewhat stronger than indicated by the CPI.

Figure I.7.
Figure I.7.

Japan: Price Indicators, 1990–2000 1/

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A001

Sources: Nikkei Telecom; and WEFA.1/ Seasonally adjusted data.

20. The WPI, in contrast, indicates that deflationary pressures have subsided in recent months. After declining by over 4 percent in mid-1999, the WPI has declined by only about ¼ percent on a 12-month basis in April 2000. The change in the domestic WPI also indicates a similar story—in fact it moved into positive territory in March 2000, the first time in over a decade that this has happened (once the effects of the sales tax increase in 1997 are excluded). The slower pace of decline in the WPI in recent months reflects essentially the pick-up in commodity prices, particularly oil prices, which have a larger weight in this index than in the CPI.

C. Demand Side Developments

21. A snapshot of real sector developments in the 1990s—captured in Figure I.8— reveals the following broad trends. The decline in private investment—both residential and non-residential—was precipitous following the collapse in asset prices. After what turned out to be a transient pickup in 1996, related in part to new opportunities created by deregulation, private investment declined sharply yet again. There appears, however, to have been a pickup in business investment in the last quarter of 1999 and in the first quarter of 2000. Residential investment also fell sharply in the 1990s, and despite the pick-up in the first quarter of this year, there appears to be considerable uncertainty about whether the recent increase marks the beginnings of a more sustained revival. Public investment, which has served as the main ingredient of counter-cyclical fiscal policy in the 1990s, filled in to some extent the slack left by private investment. Private consumption did not fall sharply in the aftermath of the collapse of asset prices; significant declines in the level of private consumption have, however, been a more recent phenomenon, occurring mainly during 1997–98, and then again in the second half of 1999. There has, however, been a rebound of private consumption in the first quarter of this year. The external sector’s contribution to growth (both positive as well as negative) has been under 1 percentage point during the course of the 1990s, except in 1997, when it contributed about 1½ percentage points to growth. There has been a strong rebounds—driven mainly by temporary factors—in the external sector’s contribution to growth in the first quarter of 2000.

Figure I.8.
Figure I.8.

Japan: Gross Domestic Product at 1990 Prices, 1990–2000

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A001

Sources: Nikkei Telecom; and WEFA.

22. The high volatility of private consumption recently has been driven by a mixture of fluctuations in confidence as well as technical factors. The declines in private consumption during 1998 overlapped with a period of financial instability set in motion by the failure of some major banks and securities houses, and the rise in unemployment. The steps taken subsequently by the Japanese authorities to resolve the bank failures, as well as the measures undertaken to strengthen the financial system succeeded in abating panic by early-1999, and private consumption rose with the gradual restoration of confidence (Figure I.9). The strength of the pickup in private consumption during the first half of 1999 was likely overstated by technical factors, in particular, due to the spillover of the traditional December bonuses into the early part of the following year, as discussed earlier. The decline in private consumption in the fourth quarter of 1999 was driven in large part by a particularly sharp decline in bonus payments, and uncertainties about job security generated by announcements to intensify corporate restructuring. Seasonal factors, as in the previous year, and sampling biases (noted above) likely overstated the weakness of private consumption in the fourth quarter of 1999. Likewise, seasonal factors (including the leap year effect) contributed to the surge in private consumption by 1.8 percent in the first quarter of 2000.

Figure I.9.
Figure I.9.

Japan: Trends in Private Consumption

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A001

Sources: Nikkei Telecom; and WEFA.

23. The slump in business investment, which has been the main driving force behind the slow growth in the 1990s, now appears to be coming to an end. Business investment fell steeply in the 1990s. The slump in business investment was particularly precipitous during 1997–98—it declined by almost 20 percent from peak to trough, a contraction far more severe than in previous recessions (Figure I.10), as the banking crisis tightened the availability of credit, particularly in the case of small and medium-sized enterprises. The pickup in business investment in the first quarter of 1999 proved transient, driven mainly by credit guarantee schemes that allowed small and medium sized enterprises to catch up on replacement investments missed out in late-1998 due to the credit crunch that accompanied the financial panic. The pickup in business investment in the fourth quarter of 1999, and the first quarter of 2000, however, appears more resilient, with rising corporate profitability, declining excess capacity, and an upturn in equity prices providing the basis for business expansion. An increase in fixed capital formation in the high-tech industries—where overcapacity is much less of an issue—has contributed importantly to the recent surge in business investment. Nevertheless, weaknesses remain, particularly in the case of small and medium sized enterprises in the more traditional sectors which are still being weighed down by excess capacity and high indebtedness—the recent Tankan Survey, for instance, captured what appears to be an ingrained pessimism among these firms.

Figure I.10.
Figure I.10.

Japan: Indicators of Business Activity and Investment, 1985–2000

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A001

Sources: Nikkei Telecom; and WEFA.

24. Residential investment has also fallen steeply in the 1990s, as land prices have fallen continuously since 1992, discouraging investment in housing. Residential investment fell particularly sharply during 1997–98 (Figure I.11), despite the decline in long term yields during this period, because of the uncertainties engendered by the fragilities in the financial sector. Residential investment increased sharply in the first half of 1999—by almost 15 percent—largely in response to the increase in tax credits for housing loans in the budget for fiscal year 1999 to stimulate the housing market. There were also one-off factors driving the rapid increases in residential investment in the first half of 1999—housing starts were accelerated to take advantage of low lending rates available through June 1999. As the effects of these temporary factors wore off, residential investment slumped by about 9 percent in the second half of 1999. Residential investment increased sharply by 6.6 percent in the first quarter of 2000, partly in response to the renewal of tax credits for the housing market.

Figure I.11.
Figure I.11.

Japan: Residential Investment and Inventory Investment, 1990–2000

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A001

Sources: Nikkei Telecom; WEFA; and staff estimates.

25. Public investment has been an important ingredient of counter-cyclical fiscal policy in the 1990s, and has tended to fluctuate with the various stimulus packages. Public investment grew by about 23 percent between the third quarter of 1998 and the second quarter of 1999, as the authorities responded to the weakening of activity following the financial turmoil by implementing fiscal stimulus packages of ¥16 trillion in April 1998, and ¥23 trillion in November 1998, with the public works component of the stimulus packages being about ¥16 trillion (about 3 percent of GDP). As the effects of these stimulus packages wore off, public investment fell by about 8½ percent in the third quarter of 1999 which, along with the contraction in private demand, resulted in a sharp decline in GDP in the third quarter of 1999. The authorities responded by announcing another stimulus package in November 1999 of ¥18 trillion, of which the allocation to public investment was ¥6.8 trillion. The effects of this package are yet to be felt on public investment, which slumped by 7½ percent in the first quarter of 2000; public works orders figures, however, suggest a strong pickup in the second quarter, but this is unlikely to be sustained.

26. The down-phase of the inventory cycle appears now to have come to an end, and restocking is providing a modest positive impulse to the economy currently. After a rapid build up of inventories in 1996—which contributed almost ½ of a percentage point to growth in that year—destocking continued essentially unabated, with a negative contribution to growth of almost ⅔ of a percentage point in 1998. As the inventory-shipment ratio fell steeply in 1999, the process of destocking flattened out, and inventories have provided a modest contribution to growth in the first quarter of 2000 (see Figure I.11). However, with the inventory shipment ratio rising in recent months, it is not clear how much longer the positive contribution to growth from inventories can be sustained.

27. Despite the improvement in the global environment in 1999, the external sector’s support for the economy has been muted by yen strength. The external sector’s contribution to growth turned negative following the sharp appreciation of the yen in the second half of 1998. After reaching a low of ¥146 per dollar in August 1998, the yen reversed course, and appreciated sharply to about ¥110 per dollar by early 1999. The depreciation of about 10 percent that occurred in the immediate aftermath of the implementation of the zero interest rate policy proved to be transitory, as the yen quickly strengthened again amid signs of a recovery in the summer of 1999, and has been trading in the ¥105–110 per dollar range in recent months. Export volumes grew modestly in 1999 overall, dampened by the appreciation of the yen, although the strength of the Asian recovery has contributed to an uptrend since mid-1999 (Figure I.12). Import growth was strong in 1999, considering the weak state of domestic demand, and has been attributed to an increase in import penetration arising from an intensification of deregulation initiatives as well as a recovery in intra-industry trade in the East Asian region as the impact of the crisis waned. Increased imports from Japanese subsidiaries located abroad, and Y2K related stockpiling in the fourth quarter were also factors influencing the strong growth of imports last year. The external sector’s contribution to growth was a substantial 0.8 percentage points in the first quarter of 2000, as the import stockpiles from the previous quarter were unwound, and exports notched a strong performance.

Figure I.12.
Figure I.12.

Japan: External Sector Developments, 1990–2000

Citation: IMF Staff Country Reports 2000, 143; 10.5089/9781451820546.002.A001

Sources: Nikkei Telecom; WEFA; and staff estimates.

References

  • Tamim Bayoumi and Charles Collyns, Post-Bubble Blues: How Japan Responded to Asset Price Collapse, International Monetary Fund, 2000.

  • Prakash Loungani, How Accurate are Private Sector Forecasts? Cross Country Evidence from Consensus Forecasts of Output Growth, IMF Working Paper, April 2000.

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  • Christina D. Romer, “Changes in Business Cycles: Evidence and Explanations” Journal of Economic Perspectives, Volume 13, No. 2, Spring 1999.

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  • OECD Economic Outlook, No. 67, June 2000.

  • Toshiaki Tachibanaki, Hiroshi Fujiki, and Sachiko Kuroda Nakada, “Structural Issues in the Japanese Labor Market: An Era of Variety, Equity, and Efficiency or an Era of Bipolarization?”, paper presented at the conference on“The Role of Monetary Policy Under Low Inflation: Deflationary Shocks and their Policy Responses” held at the Bank of Japan July, 3–4, 2000.

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1

Prepared by Ramana Ramaswamy (ext. 38591).

2

For a detailed discussion of the causes of the slow growth in Japan in the 1990s, see Bayoumi and Collyns (2000).

3

See Romer (1999) for a systematic discussion of these issues.

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Cover IMF Staff Country Reports
Japan: Economic and Policy Developments
Author: International Monetary Fund
Volume/Issue:
Volume 2000: Issue 143
Publisher:
International Monetary Fund
ISBN:
9781451820546
ISSN:
1934-7685
Pages:
101
DOI:
https://doi.org/10.5089/9781451820546.002

Japan: Growth and Volatility Comparisons

Japan: Forecast Errors and Variability of Forecasters, 1991–99

Japan: All Industry Activity Index

Japan: Industrial Production and Information Technology

Japan: Corporate Survey, 1985–2000 1/

Japan: Labor Market Conditions, 1990–2000

Japan: Price Indicators, 1990–2000 1/

Japan: Gross Domestic Product at 1990 Prices, 1990–2000

Japan: Trends in Private Consumption

Japan: Indicators of Business Activity and Investment, 1985–2000

Japan: Residential Investment and Inventory Investment, 1990–2000

Japan: External Sector Developments, 1990–2000