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Ground laid for sunshine economy

By Geoff Hiscock Asia Business Editor
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(CNN) -- After more than five years in the job, Japanese Prime Minister Junichiro Koizumi leaves office this month knowing that on his watch, the ground has been prepared for a sustained recovery in the world's second largest economy.

Koizumi's successor will inherit the sunniest set of economic numbers seen in more than a decade.

Japanese business confidence is up, the jobless rate is down, the banks are lending money to start-ups, consumers are no longer afraid to spend now that deflation is being kept at bay, land prices are finally on the rise and key export markets such as the United States, Europe and China are still buying.

There is always the possibility of a dramatic shift in any or all of those factors, but regional analysts agree that the Japanese economy is now in its longest period of unbroken expansion since the 1960s.

Real growth in gross domestic product (GDP) has averaged 2 percent plus since mid-2002, and will likely come in at about 2.3 percent this year and next.

It's a run that could continue to the end of the decade, in the view of analysts such as IMA Asia. That should embolden Koizumi's successor, given that keeping the economy running smoothly will be a key performance indicator.

Koizumi can't claim credit for all of the good news, but cleaning up the banks, keeping a lid on government spending and pushing ahead with key reforms such as postal system privatization have been economic hallmarks of his era.

Political will

Koizumi has had the political will and the public support to take steps that many in his own Liberal Democratic Party found repugnant and against their interests.

Koizumi also saw some of the worst of times. With oil prices on the rise, a war under way in Iraq and domestic banks in bad shape, Japan's key stock market indicator, the Nikkei share average, dropped to 7,607 in April 2003, its lowest figure in 20 years. That number was barely a fifth of the record 38,915 seen at the end of the 1989, when for a fleeting moment the Tokyo Stock Exchange had the largest market value in the world.

Also in April 2003, Japan's jobless rate reached a postwar peak of 5.5 percent, up from just 2 percent in early 1992. Now in 2006, the rate is down to 4.1 percent, and the number of jobs available is the highest in 14 years.

Unemployment was just one part of the pain Japan had to endure after the speculative "bubble era" of the late 1980s and early 1990s. That was a time when cozy links between bureaucrats, big business and shady operators were the norm, extravagance was the corporate world's signature and phantom empires were being created with funny money.

In the wake of collapse came more than a decade of stagnation and decline, when property prices tumbled, business confidence languished, bad debts ballooned and Japan struggled to put together any sustained economic recovery. There were occasional spurts of growth, but all too frequently they were followed by recession -- three in all, between 1991 and 2002.

Residential land prices fell 33 percent between 1990 and March 2005. But for the first time in 14 years, land prices rose last year in five major cities, led by Tokyo.

According to IMA Asia, that recovery in Japan's property prices is as important to the improved outlook as it was critical to the previous economic stagnation.

"The real estate recovery should help clean up the remaining trouble spots on corporate and bank balance sheets, while providing cash for new investment," IMA says.

Structural reform

Under Koizumi, the commitment to structural reform was put in place, though the International Monetary Fund and other outside observers argue that more needs to be done.

IMF managing director Rodrigo de Rato told reporters in Tokyo on August 3 that he was "very optimistic" about Japan's economic prospects.

De Rato said restructuring had strengthened Japan's corporate and financial sectors, and deflation pressures were abating.

But he warned that major policy challenges remained and urged Japanese policymakers to be ambitious in tackling them.

"Given the aging population, it is especially important to take steps to encourage participation by women, marginalized youth and older workers in the labor force," he said.

Deregulation of services and liberalization of agricultural trade were other areas for reform.

This is a view also being pushed by the Organization of Economic Cooperation and Development. In its Japan survey released in July, the OECD said the country's "post-bubble obstacles to growth have been largely overcome."

But to keep the economy growing in the medium term, Japan needed to meet a number of goals. These were to achieve a "definitive end" to deflation; ensure any interest rate rises were not too early or too large; address income inequality; cut the government budget deficit; boost productivity growth; and better integrate Japan into the world economy through more use of imported goods, services, capital, technology and labor.

According to IMA Asia, the most notable contributor to Japan's economic recovery is business investment, with companies planning to lift capital spending by 13 percent in the 2006 fiscal year, the fastest pace in 16 years.

Richard Jerram, Tokyo-based economist for Macquarie Research, agrees there is a steady flow of evidence pointing to a prolonged revival in the domestic economy.

He notes a resurgent banking system is starting to make a big contribution to growth, through increased lending to small firms.

But Jerram warns that a renewed assertiveness among the bureaucracy raises the risk of attempts to delay postal reform. A new prime minister might reinvigorate the reform process, he says.

According to Barclays Capital economists Takujia Aida and Yuichiro Nagai, growth this financial year and next should be stable at 2.3 percent.

They say that if the polls are right and Chief Cabinet Secretary Shinzo Abe takes over from Koizumi, it will likely mean a continuing priority on government spending cuts over tax increases.

"This approach to fiscal consolidation may be slower, but ultimately should improve public finances by promoting longer-term stable growth," they say.

The economy is in better shape after Koizumi's progress on structural reform.


Real GDP growth 2.3% (FY06)
Jobless rate 4.1% (July 06)
CPI rate 0.8% (FY06)
Yen/dollar average 113 (FY06)
Export growth 7.3%
Import growth 5.3%
Sources: BOJ, Macquarie
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