x Abu Dhabi, UAEFriday 28 July 2017

Japan's recovery has not delivered on spending

The Asian giant is now in a rebound led by exporters. That should show policymakers that their strategy of stuffing citizens' wallets with cash was not the effective response.

It was with relief that Japan's government and the rest of the world greeted the latest economic data and company results to emerge from Asia's big economy. GDP in the first quarter of the year rose by 4.9 per cent compared with the same period last year, and many of Japan's corporations returned to profit in the year to March after a bruising two years of global downturn.
With it, global angst about the risk of a double-dip recession eased and investors moping over the debt crisis in Europe had something to cheer about for a change. Toyota, rebounding from a collapse in car demand particularly in the US, was the leading corporate giant to return to profit. Despite the embarrassment and cost of recalling more than 8 million vehicles worldwide to fix design faults it still posted US$2.3 billion (Dh8.44bn) in net income for the business year.
Even the lumbering industrial conglomerate Hitachi, which makes products as diverse as beard trimmers, nuclear power stations and escalators looked healthier. It had a loss of $1.2bn for the 12 months, but compared with the amount it has lost over the past five years it was encouraging. Last year it was more than $7bn in the red, the biggest loss ever by a Japanese manufacturer. Shareholders were also pleasantly surprised by Hitachi predicting it would return to profit this year.
The rebound by Japan Inc and the money it has been spending on new plant and equipment contributed heavily to Japan's continued recovery in the first three months of the year. The corporate comeback is also evident to many Japanese. Wages edged up in March for the first time in almost two years and the ratio of jobs to job hunters also improved. The extra tax revenue that profits and higher earnings will generate will also be welcome relief to a government looking with growing unease at mounting public debt.
Yet for all the backslapping, the rebound is also a failure for Japan's economic planners. It is not the kind of recovery they wanted. Since its asset price bubble collapsed 20 years ago, successive teams of policymakers have tried and failed to boost consumer spending at home. But no amount of yen thrown at the domestic economy has ever really helped. All Japan got in return was the industrialised world's largest public debt, which is fast approaching twice its GDP.
In the first quarter, domestic consumption accounted for only 17 per cent of growth, meaning that this recovery, like nearly every other before it, is driven by exports. Japan's resurgence is not an engine of global growth, it is a consequence of it. It may also be a disappointment to Yukio Hatoyama, the Japanese prime minister, because he and his party, the Democratic Party of Japan (DPJ), cannot claim responsibility for the turnaround.
Like governments before them, the DPJ reckoned it knew how to open consumers' wallets. Instead of spending money building extra dams, roads to nowhere, or other questionable infrastructure to stimulate economic activity, its idea was to give the money directly to Japan's citizens, to empower them with benefits and subsidies. Mr Hatoyama's backers may argue his government needs more time but the latest batch of corporate profits and GDP numbers suggest their approach is not working.
The next time Japan dips into recession and its leader judges another round of stimulus necessary, he should try something different. If the Japanese want to get consumers shopping again, rather than spending money on their own spendthrift population they may get more bang for their yen by giving the cash to Americans, Europeans or Chinese instead. As the rebound with Japan's exporters proves, it is much easier to persuade them to go out and buy the latest Toyota car, Sony TV or Nintendo game console.