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Tuesday, 18 January, 2000, 17:42 GMT
Has Japan turned the corner?

Tokyo night Mnay feel the foundations for a Japanese recovery are in place

Japan's millennium hangover was worse than most.

It woke up to the 21st century still reeling from a 1980s frenzy, whose eventual collapse plunged the country into recession.

But 1999 brought with it signs of a fragile recovery. Pundits now predict growth of 1% to 2% in the coming year.

But for the recovery to continue, many say more reform is needed.

In recent years, the Japanese government bit the recovery bullet, pushing through banking reform, the world's first zero interest rate policy and spending packages, all designed to get the country back on its feet.

The Nikkei's strength last year indicates that the government has investor approval but Japanese voters have still to be won over.

Harsher economic conditions are seen as a principal cause for the growth of suicide in Japan, and many critics say reforms are widening the gap between rich and poor.

The bubble bursts

Since the speculative asset price bubble burst, the country has also had to weather the Asian crisis as well as domestic banking failures.

Unsure what the future would bring, consumers tightened their belts and much of the nineties was dominated by an official reluctance to embrace reform and the social upheaval it would bring.

The post-war economy has been built on company loyalty, with many Japanese executives effectively married to the one company for much of their life.

NTT building NTT shed jobs last year
"Jobs are more important than profits...I openly brag that I don't cater to shareholders," former chairman of Mitsubishi Heavy Industries Kentaro Aikawa said in 1998, comments indicative of the way Japanese business worked.

A lot can change in a year. Last year, NTT announced plans to axe 21,000 jobs, or 16.4% of the workforce, from its domestic operation by March 2003. Mitsubishi Motors followed suit, cutting nearly 10,000 jobs.

While Mr Aikawa's attitudes may have held sway when companies were owned by stable shareholders, the fact that more demanding foreigners now own about 20% of the stock market, compared to 3% in 1990, has made a difference.

This corporate restructuring has had a huge social impact.

Unemployment has dropped from its record of 4.9%, registered in June last year, but is still forecast by some pundits to hit 7% in the next few years. If it does hit fresh highs, this could also derail the consumer confidence that does exist.

Funding the deficit

Buying back consumer confidence hasn't been cheap.

Consecutive supplementary budgets - the last one totalled $825bn - have given Japan the largest budget deficit in the industrialised world.

Its options for reducing this debt are limited. Unless growth surges - boosting tax revenues with it - its best chance may be to sell some government assets.

Tax reform could also be on the agenda. People on lower incomes may face heavier taxes. While the government will likely want to eliminate some of the special tax breaks used by many wage earners to avoid income taxes.

Reforming glories

While the tax system might still need reform, the government does have a few laurels it can rest on, if only briefly.

Keizo Obuchi Prime Minister Obuchi still has work to do
Last September, the government sold LTCB to a US investment group late last year. The sale of the bank was seen as a key test of Tokyo's resolve to clean up the banking sector, a sector dogged by bad loans.

The country's Big Bang helped channel some of the Japanese savings into the stock market. Japanese households save around 30% of their income.

The reforms introduced on 1 October have removed fixed-rate commissions on share trades. The move has ushered in a new era of discount retail broking, an era in which low-cost online brokerages are likely to flourish.

The recovery party could yet be spoiled by a strong yen. The strengthening yen may put a brake on the growth, hindering Japanese exports.

But even with a stronger yen, continued demand for imports in the US, a recovery in other Asian countries could sustain Japanese exports

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See also:
06 Dec 99 |  Business
Japan suffers surprise slump
11 Nov 99 |  The Economy
Japan's billion dollar spending spree
13 Dec 99 |  Business
Japan's hesitant recovery
16 Nov 99 |  The Economy
Japan's tentative economic recovery
17 Nov 99 |  The Company File
NTT to slash workforce
20 Dec 99 |  Business
Japan approves new budget boost
27 Oct 99 |  The Company File
Mitsubishi Motors to cut 9,900 jobs
12 Mar 99 |  The Economy
Japan bites banking bullet
30 Jul 99 |  The Economy
Japan unemployment record
28 Sep 99 |  The Company File
US group buys Japan's LTCB

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