Exports have traditionally rescued the mighty Japanese and German economies from downturns. But new figures show both countries' economies shrank in the last quarter, despite strong world trade. What has gone wrong?
THE world's second and third biggest economies both got a little smaller last quarter. Japan's gross domestic product contracted at an annual rate of 0.5% in the final quarter of 2004, according to figures released on Wednesday February 16th. The numbers from Germany the day before were grimmer still. Its economy shrank at an annualised rate of 0.9% in the same period. Both economies started 2004 well, but failed to live up to the expectations they fleetingly raised.
Japan's figures bemuse as well as disappoint. As the yen value of Japan's output fluctuates, the statisticians must sort out how much is down to changes in prices rather than quantities. For much of last year, prices seemed to be falling sharply and quantities rising. But the cabinet office introduced a new way of counting GDP in November, which showed less deflation, but less output as well. Since November, however, the cabinet office has reworked its recalculations several times.
It said it now reckoned that the economy contracted by 0.8% in the second quarter and 1.1% in the third, meaning that Japan spent three-quarters of last year in recession. Richard Jerram, an economist at Macquarie Bank, laments that estimates of Japan's GDP are "such a rapidly moving target" it is hard to make much sense of them. Japan's official statistics, it seems, offer lies, damned lies and revised lies.
What does seem clear, however, is that Japan is in the grip of a protracted "inventory cycle". Makers of goods, unlike service providers, can stockpile their products, ready for future sale. When sales fall, however, manufacturers seek to clear their groaning shelves by cutting production by more than the fall in sales. Japan's manufacturers, after adding to their inventories at a healthy pace in the first quarter of last year, spent the remaining nine months waiting for their shelves to clear.
Sales may be about to pick up again, however. Orders for machinery from abroad were at record levels in December, and consumer confidence rose last month. Economists nevertheless remain divided about whether this fragile and fretful recovery will be sufficient to drag Japan out of its structural slump.
It has, after all, been more than a decade since Japan first succumbed to debt-deflation, with falling prices raising the real burden of accumulated borrowing. Japan's banks and companies have worked off some of these debts since then. The gross interest-bearing debts of Japan's corporations fell from 146% of GDP in the 1993 fiscal year, to 84% in 2003. Debt held by banks has also fallen. But, as Andrew Smithers, an independent analyst, points out, Japan's debt burden has been shifted, not lifted-from the shoulders of firms and banks on to the backs of taxpayers. The government's (gross) debt burden grew from 72% of GDP in 1993 to 162% in the 2003 fiscal year.
Inflation, should it ever return, would erode the burden of those debts. But some in Japan's policymaking circles are not willing to wait that long. In December, the government announced that in January 2006 it would halve an income-tax rebate, which can be worth ¥290,000 per person. Last month, the finance minister threatened to raise the consumption tax, a move widely blamed for snuffing out Japan's last promising recovery, in 1997. Such contractionary policies sit uneasily beside such bad economic numbers. Either the politicians are myopic, or the figures are so unreliable they are being ignored.
In Germany, like Japan, recovery usually starts abroad. The order books of the two countries' giant manufacturers, from Siemens to Sony, quickly fill as the world economy revives. The stimulating effects of foreign sales then multiply throughout the domestic economy. And last year was a vintage one for world trade. In 2004 Germany carried off the prize for the world's leading exporter (of goods, if not of services) for the second year in a row; and Japan's manufacturers hitched a ride on China's prodigious investment boom. But towards the end of the year both economies departed from the usual script of an export-led recovery.
In Japan's case, what was surprising and encouraging about its strong start to 2004 had been how little it owed to international trade. Most first-half growth came in fact from domestic consumption and investment. But in the second half, investment growth slowed, while consumer spending actually fell. Meanwhile, unaccustomedly, Japan's imports grew rather faster than its exports: in the final quarter, imports grew 3.1% (quarter-on-quarter) while exports increased by only 1.3%. This meant that a greater share of Japanese demand was filled by foreign producers, thereby affecting Japanese firms' contribution to GDP.
If Japan had a consumption boomlet that fizzled out in 2004, Germany never had one in the first place. According to Goldman Sachs, an investment bank, Germany's "silent corporate revolution" may partly explain the failure of domestic demand to respond to the country's strong export performance. The much noisier overhaul of Germany's welfare system, pursued by Gerhard Schrφder, the chancellor, may also have been a factor. German firms have squeezed extra hours out of their workers, but for no extra pay. In June, for example, Siemens lengthened the working week from 35 hours to 40 in two plants, without raising wages. Wage moderation has also prevailed in Germany's public sector.
Workers, therefore, have had no extra money to spend: retail sales fell in December, for the third month in four. The shops, in turn, had no reason to hire. Thus the sales assistants they might have employed remained on Germany's jobless rolls, which topped 5m in December, where they linger, waiting for Mr Schrφder to cut their benefits.
By: N. Peter Kramer
