Can it be that Japan is slipping back into recession? The odds are still against it, but it now appears possible. The timing could not be worse. A major currency crisis is roiling through Asia that will have a significant deflationary impact. Japan's renewed weakness now threatens to throw much of the Pacific Rim into serious trouble. It is time for Tokyo to move beyond simply deregulating the financial sector to opening up the entire economy. And Prime Minister Ryutaro Hashimoto should seriously consider a major downsizing of Japan's enormous bureaucracy. The huge savings would allow for a major cut in taxes that would stimulate consumer spending.
Raising the value-added tax to 5% from 3% is the proximate cause of Japan's current woes. Consumers piled into shops to beat the tax in the first quarter of the year and gross domestic product grew at a quick 6% annual rate. Once the tax hike went into place, consumers stayed home. Vice Minister for international affairs Eisuke Sakakibara now says that second-quarter GDP likely shrank by 6%, leaving Japan with virtually no growth to date for 1997. Worse, growth in the third quarter may also decline, pushing Japan into a technical recession. Land values are still falling. The Nikkei is worried and has dropped below 19,000 on occasion. Contrast this with record levels for the U.S. Dow Jones industrial average, the British FTSE, and all of the Continental European stock exchanges.
Much of the rest of Asia is facing lower growth as well. The currency crisis began in Thailand and spread to Singapore, Malaysia, and the rest of Southeast Asia. It is now moving north to Hong Kong and perhaps China. Hong Kong authorities are pushing interest rates higher to stem the speculative pressures. This can only hurt growth if it continues. Elsewhere in Asia, governments are raising interest rates and taxes to balance budgets to buttress weak currencies. The net effect is deflationary.
Two years ago Japan decided to devalue its own currency against the dollar in order to spur exports and stimulate a stagnating economy. Instead of cutting taxes and boosting consumer spending, it went its traditional mercantilist route. The growing trade surplus with the U.S. is now a source of tension between the two nations.
It is time for Japan and Asia to shift their economic model. A more balanced consumer society can provide quality, sustainable growth. Smaller, leaner governments could permit lower taxes. More open markets could curb crony capitalism and the misallocation of credit that have generated "bubble" economies throughout Asia. This is a time of great opportunity for change, and Asian governments should seize the day.