Morgan: Japan will 'stumble through'


Morgan says he would prefer to see proof of reform and the encouraging data have not removed doubts about the recovery

By Geoff Hiscock
Asia business editor

TOKYO, Japan (CNN) -- The buildup of positive data about the Japanese economy continued Monday with machinery-order data.

New figures show core machinery orders were 0.2 percent higher for May, over the previous month.

That suggests that Japanese businesses see better prospects ahead. Economists had been forecasting a decline.

Another key indicator is showing its best performance for more than two years. The positive figures are prompting analysts to upgrade slightly their outlook for the world's second largest economy.

But a dramatic improvement is not on the cards, economists here tell CNN, and there are still plenty of impediments to a sustained rebound.

Riding on back of global recovery

Rather, in the words of HSBC Securities chief economist Peter Morgan, Japan will "stumble through" and hope for a pickup that allows it to ride on the back of a global recovery.


Koizumi (r), here with FIFA Chief Sepp Blatter, has not made much progress against vested political interests

Morgan told CNN on Monday in Tokyo that Japan's outlook was as good as could be expected. But he said he would be happier if he saw more evidence of structural reform.

He explained that the big banks' failure to take hard decisions on bad loans, for example, mean that Japan still had excess capacity in its system.

"It is a sin of omission," he said. The Japanese economy "could be performing so much better."

Japanese Prime Minister Junichiro Koizumi came to power in April 2001 with a commitment to structural reform. While he insists his reform agenda is still in place, he has been unable to make much progress against vested political interests.

Along with the machinery orders -- prompting the first government upgrade since September 1999 -- other figures released Monday show wholesale prices remain steady (full story).

Diffusion index at highest since 2000

Those statistics follow the release on Friday of the May diffusion index of leading indicators, now at its highest since February 2000. This forward-looking index includes job offers and housing starts.

Morgan said the housing pickup was a good sign. He said housing prices had dropped so low that yields on rental housing were starting to look attractive for builders.

The new round of data comes on the heels of the Bank of Japan's upbeat tankan survey of business confidence (full story).

The reports have prompted optimistic comments from Japanese government leaders, with chief cabinet secretary Yasuo Fukuda telling reporters Monday the downward trend is at an end.

But there are still concerns about capital spending and the extent of any rebound.

"While this is encouraging, the BOJ Tankan survey suggests that any recovery from here on is likely to be modest," Ryo Hino wrote of the machinery orders figures.

The dollar-yen exchange rate and the pessimism about a sustained turnaround in the United States following scandals such as Enron and WorldCom continue to cloud the economic picture.

On Sunday, Economics Minister Heizo Takenaka said that pessimism about yen strength -- or more accurately, the weakness of U.S. dollar - was as bad for the economy as being overly confident (full story).

The yen has strengthened below 120 to the dollar again, standing at 118.71 in early European trade on Monday.

Yen around 115 is a 'worry'

Morgan says the exchange rate remains of "potential concern." Most big Japanese exporters such as consumer electronics maker Sony and automaker Toyota are assuming a yen rate of about 124 in their planning for the 2002 fiscal year.

If the U.S. dollar weakens to the point where the yen is at 110 to 115, it "becomes a worry," Morgan says.

The government on Monday upgraded its assessment on machinery orders for the first time since September 1999.

In its latest forecast of the Japanese economy, HSBC expects to see a slight contraction in the year to March 2003, following by growth of 0.7 percent to March 2004.

But Morgan notes that the recovery in Japan is primarily export-driven, with little domestic stimulus other than housing growth and some wages improvement.

That means the health of the U.S. economy remains the critical factor, along with the weakness of the U.S. dollar.