A Glimmer Of Glad Tidings In Japan

It still may be premature to declare an end to Japan's worst recession in the postwar era, but at least the good news continues to outweigh the bad.

Housing starts in June were up 10.6% from a year ago, and industrial production increased 2% in June from May to stand even with its level of a year ago--a major improvement from its 4.3% shortfall just four months ago. Moreover, consumer confidence increased for the second straight time in the second quarter, rising a large 7.9%.

That optimism is being fueled in part because of the strides made against inflation, helped by cheaper imports. Consumer prices for all of Japan fell 0.4% in June. And in Tokyo, the slide continued into July, with prices dropping 0.3%. Excluding fresh foods, the core inflation rates have slipped to less than 1% both nationally and in Tokyo (chart). And inflation could sink to zero before very long.

With bargains to be had, consumers were out shopping. Retail sales were up 0.7% in the year ended in June, the first 12-month increase in two years. Spending was buoyed by the first of two tax cuts, work bonuses, and record temperatures, which boosted demand for hot-weather items. And for July, initial reports on spending look promising.

However, Japan's labor markets remain shaky. The unemployment rate edged back up to 2.9% in June, from 2.8% in May. And the ratio of applicants to jobs fell to a seven-year low of 63 for every 100 positions.

So too, Japanese corporations are still struggling because of endaka--the super-strong yen. Indeed, with the surging yen abroad and deflation at home, businesses are seeing revenues shrivel. So, corporate profits are likely to fall in 1994--the fifth consecutive year of decline. Because business investment is key to improving Japan's competitiveness and productivity, some analysts worry that Japan's economy cannot sustain a recovery without a rebound in profits.

In order to bolster demand, at least at home, the Japanese government is discussing a delay in the sales-tax increase that was supposed to offset this year's income-tax cut. While politically risky and not even certain to be implemented, fiscal stimulus would help to keep Japan's economy moving a bit faster toward recovery.

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