Government officials are voicing greater concerns about Japan's recovery, and the reason is the yen. On May 25, Bank of Japan governor Yasuo Matsushita warned a banking group that "the recent additional rise of the yen might stall improvement in corporate profits and business sentiment."
Clearly, the yen-induced weakness in exports is slamming profits and output, causing record unemployment. The Ministry of International Trade & Industry said industrial output fell 0.2% in April. The decline was a surprise, and MITI's survey of manufacturers has projected that output will fall an additional 0.8% in May and 2% in June (chart).
Consumers are also struggling this quarter. Sales at department stores and supermarkets in April were down 1.7% from a year ago, after total household spending fell 0.6% in the year ended in March, the sixth drop in a row. Employment worries are fueling the cutbacks. The jobless rate hit a record 3.2% in April, with only 65 job offers for each 100 applicants.
Household budgets are getting some relief, however, from Japan's spreading deflation. Consumer prices in Tokyo dipped slightly in May, compared with a year ago. That was the third straight decline. Moreover, prices excluding food fell 0.1%, the first drop on record. Price data in Tokyo typically lead trends in the rest of the country. In April, prices nationwide fell 0.2% from a year ago.
Falling factory activity and soft consumer demand hint that Japan's economy is declining this quarter. Other worries suggest a sluggish second half: The banking system remains shaky, and fiscal stimulus will be only modest.
In May, the Organization for Economic Cooperation & Development cut its forecast for 1995 growth in Japan to 1.3%, from 2.5% projected in December. The economy expanded just 0.9% in 1994. For now, the Finance Ministry is sticking to its forecast of growth of 2.8% in the year ending next March. But with the yen rising and public remarks growing more anxious, Tokyo may have to scale back its rosy outlook soon.