ECONOMIC SPOTLIGHT - JAPAN LOW GROWTH MODEL
Healthy growth in corporate profits and in
consumer spending, the two pillars on which Japan rests its
hopes of sustained economic growth, both look rotten at the
core, economists polled by Reuters said.
    Profits and domestic consumption are meant to replace
exports as the engine of growth. But close ties between
corporate performance and wages mean that the alternative
economic model promises little but slower growth, they said.
    Falling profits may lead to falling incomes, which in turn
will cut sales and further reduce profits.
    The Bank of Japan said in its latest outlook that improved
terms of trade linked to the strong yen would help domestic
demand grow steadily.
    However, this would happen only if household spending
increased in line with the value of real financial assets due
to stable prices, and/or if corporate investment recovered as
profits from domestic sales improved compared with those from
exports.
    "No clear sign of such developments has so far been
evidenced," the central bank said.
    Poor business prospects are the reason why economic growth
will be slow, even though Japan's terms of trade have improved
sharply due to the strong yen. Economist David Pike of Phillips
and Drew estimates that in 1986 unit cost prices fell 30 pct
while output prices fell only eight pct, giving a large price
margin advantage in the domestic market -- as long as companies
did not pass that advantage on to the consumer.
    Last year's gap of almost 10 percentage points between the
fall in the wholesale price index and the slight drop in
consumer prices shows that gains from the improved terms of
trade have been kept as profits by producers and distributors.
    The economists, however, believe this layer of fat will
protect companies for only a short while. As more firms seek
more profits at home instead of abroad, already fierce domestic
competition will increase, fueled by lower-priced imports.
Retail prices will fall. Profit margins will suffer.
    A December survey by top business organisation Keidanren
confirms this dim view is taken by the firms themselves.
    Of companies polled in the key manufacturing sector, almost
80 pct thought the high yen would create a drop in production
volume and 60 pct predicted a drop in corporate performance,
said Keidanren economist Kazuyuki Kinbara.
    Main counter-measures cited by the firms include cutting
unprofitable operations, reducing work to sub-contractors
(which employ significant numbers of workers), holding down
wages, and reducing bonuses. The government has said it fears
unemployment could soon double from three pct now.
    Unemployment and slow wage growth will obviously hurt
sales. But reduced bonuses, and worries about individual
financial security could be even more damaging.
    Twice a year, bonuses provide wage earners with what
amounts to an enforced lump sum in savings, encouraging them to
buy large consumer products and sparking a sales bonanza.
    To save funds, some big firms have begun a form of tied
bonus, forcing employees to spend it on the firm's own goods.
    Economists also predict Japanese will not save less than
the average 16 pct of salary they do now. On the contrary, a
poor outlook and lower disposable income could strengthen the
resolve to put money aside for old age and illness, education,
and housing -- the main drains on the working man's salary.
    The last government survey of public opinion said over 80
pct of citizens will continue to economise. Japan has a rapidly
ageing population and minimal social security and its workers
fear poverty in their old age.
    Faced with such a vicious circle, the government's
reflationary strategies are severely limited.
    The commitment by the ruling Liberal Democratic Party and
Finance Ministry to cut the state debt has resulted in small
supplementary budgets and attempts to provide fiscal incentive
without reducing revenue. Independent economists have been less
than excited at the results.
    Provision for monetary stimulus is similarly limited.
    The 2.5 pct discount rate is so low it is politically
impossible to cut it further, with the basic bank savings rate
at only 0.25 pct, Bank of Tokyo economist Haruo Muto said.
    Almost 60 pct of Japanese still hold their savings in some
kind of deposit, official figures show.
    Moves to directly inject liquidity are unproductive while
firms are planning cuts in capital investment.
    The central bank is well aware that soaring stock and land
prices are the only current results of high liquidity.
    Fear of inflation also limits policy options. Political
analysts ascribe Prime Minister Yasuhiro Nakasone's 1986 big
election victory largely to a long period of almost zero price
inflation. And he found this year that attempts to impose a
sales tax to offset tax cuts arouses fierce voter opposition.
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