Table Speech

“The Trend of Japanese and World Economy”

November 11, 2009

Mr. Toshiro Mutoh
Chairman of the Daiwa Institute of Research Ltd.

 “The World Economic Outlook” published by IMF in October forecasts a positive real GDP growth rate in the world, taking an upward turn from the negative growth among major powers in 2009. China’s growth rate is striking, with 8.5% for this year and 9.0% next year, achieving the government’s initial target of over 8%. IMF forecasts 1.7% economic growth rate for Japan in 2010, but our view is much more cautious at 0.9%. We share the notion that both the Japanese and world economies are entering the recovery phase, yet there are some requirements to be achieved for sustained economic recovery in Japan. Scores of years have passed since it was said that Japan must shift from external demand-led to domestic demand-led economy. Yet, Japan still has not broken out of the mold of export dependence. Even if various measures are taken, I personally find it too optimistic that domestic demand will propel economic recovery. We have no choice but to depend on external demand in order to achieve future recovery.

 Here, the economic condition in the US will have vital impact on Japan.

(1) Outlook for US economic recovery
 Although the US economy is said to be in the recovery phase, official documents by the FRB indicates its intention to keep the zero-interest-rate policy.

 When we look at consumer spending, family finances in the US are heavily burdened with debts. This was because housing mortgages turned into bad loans, due to plummeting housing prices. Saving rate must be raised to solve the current situation. Although saving rate was just around 1% in 2008, it has recorded a sharp rise of 4-5% recently. Considering the fact that the rate was 7-8% in 1990s or even 10% in1980s, saving rate is most likely to show further rise.

 Consumer spending in the US is a gigantic engine, pulling the world economy and having a huge impact worldwide. Although the US is believed to have emerged from its financial crisis, there is still a risk of a relapse, as many financial institutions are heavily burdened with nonperforming assets. How to dispose of these nonperforming assets is an alarming issue to be addressed. In Japan, several banks failed in the late 1990s, when the bubble economy collapsed. Banks were optimistic, hoping they could get rid of nonperforming assets as the market recovered. What we saw was “off-balancing,” a rather strict US-style disposal measure that sheds nonperforming assets from the balance sheet.

 Another point of concern is the massive negative legacy weighing on FRB, resulting from drastic financial stimulus measures and the financial institutions bailouts. For example, the Citigroup or Bank of America is thriving by infusion of public funding worth trillions of yen. Superb policy it might be, as the all-out measure succeeded in overcoming the crisis. Yet, taking a different view, the FRB balance sheet showed dramatic expansion after the Lehman shock in September 2008. Its asset size is around 900 billion dollars in normal times but exceeds 2 trillion dollars today, which proves the FRB took quantitative easing policy. It is understandable that some in the FRB are concerned that such abundant capital in the private sector might trigger inflation.

 In November, the IMF gave its outlook on fiscal revenue and expenditure of each country, which proves financial deficits of the US and UK have exceeded that of Japan, due to massive issuance of government bonds to secure funds. Data indicates the ratio of country’s financial deficit against GDP: figures for the US is -12.5% (2009) and -10% (2010), the UK -11.6% (2009) and -13.2% (2010), and for Japan -10.5% (2009) and -10.2% (2010). Failure in policy development will trigger falling price of government bonds and an increase in long-term interest rates.

 Recent data shows a positive sign of US economy, raising expectations for its recovery. Yet, we must bear in mind that there remain some factors of concern and therefore, over-optimism is a potential risk.

(2) Perspective on Chinese economy
 Forecast for Chinese economic growth continues to be exceeding 8%, boosted by its massive public spending worth 4 trillion yuan (about 50 trillion yen). Public investment, such as construction of highways or rapid transit railways, is most likely to improve rapidly its economic efficiency. Although there are potential concerns of a bubble economy, rising land prices and excessive facilities, I personally believe that Chinese economy will achieve sustained growth up to around 2012.

(3) Outcome of economy-boosting measures taken in Japan
The previous government injected an unprecedented “real-water” fiscal spending worth 15 trillion yen in April, a decision made in line with President Obama’s fiscal stimulus measures of around 800 billion dollars (about 70 trillion yen).

 Since the new government began, it has focused on reviewing the stimulus measures worth 3-trillion-yen, which is likely to trigger a 0.2% reduction in the economy. It is quite logical that the new government is trying to shift financial allocation from companies to household accounts. Yet, sound financial policy based on well-discussed growth strategy is crucial for the coming budget compilation, which switches its focus to domestic demand-driven policy. Other issues of concern are deflation, marking an alarming rate of over 1%, and unemployment rate stuck at a soaring level, resulting from declining corporate profits.

 In conclusion, I do not intend to say that Japan will experience double-dip recession. However, we have to be prepared for possible negative growth during the first half of 2010.