A Disaster, Yes. A Crippling Blow, NoRobert Neff
By many measures, Takaaki Hashizume is a ruined man. The earthquake that hit Kobe on Jan. 17 destroyed his rented house and a restaurant he had built on the first floor. Hashizume, 46, wasn't insured against a quake and has minimal savings. But down in the mouth? Hardly. As they cook dinner over wood scavenged from his home, Hashizume and his family are quick to offer some rice gruel to a curious reporter. "If we think about the future too much instead of eating what we have, we'll just lose spirit," Hashizume says. He reckons he'll open a new restaurant when the rubble clears.
With that kind of pluck, Japan may be able to continue and even accelerate the halting economic recovery that began last year. Despite the market's delayed but nervous reaction to the quake on Jan. 23, when the Nikkei stock index plunged by 5.6%, many economists and chief executives remain sanguine about Japan's economic prospects. There will be pain, they say, but it is unlikely to reverse upward trends in consumer spending and industrial growth. Even more bullish is Chris Calderwood, an economist at Barclays de Zoete Wedd Research Ltd. in Tokyo: "We expect a significant acceleration in growth." He's predicting 2.5% for this year (chart).
A key reason for the optimism is consumer spending. It has been rising for several months as a stronger yen, deregulation, and bargain-hunting have brought prices down and consumers back to stores. Except for a short-term jolt to consumer confidence after the quake, spending is likely to continue--especially if worker bonuses rise this summer. Sinking real estate values and an expansion of government subsidies had bolstered demand for new homes even before the temblor. A $55 billion income-tax cut and a plateauing of unemployment at 3% are giving an added kick to consumer sentiment. At Tokyo Mitsubishi Motor Sales, President Akira Kawakami expects to sell 5% to 8% more cars this year than in 1994. "Things are finally picking up again," he says.
PROFITS UP. There are other pockets of strength. Industrial production rose for the fourth straight quarter from October through December, according to the Bank of Japan. Corporate profits will likely surge up to 60% this year, as the benefits of recent restructuring are realized. "During the past two years, we have completely reshaped our cost structure," says Tatsuro Toyoda, president of Toyota Motor Corp. The company says that in its fiscal year ended last July, it cut costs by $1.5 billion.
With $20 billion in the bank, Toyota isn't the only Japanese company flush with cash. And these full pockets may produce a modest resurgence in capital spending. Such expenditures declined for 11 straight quarters until a 0.5% rise in the third quarter of last year. Barclays de Zoete Wedd predicts a 1.7% gain this year and 3.2% next year. NEC Corp., for example, has budgeted more than $1 billion to refurbish its Kumamoto semiconductor plant.
But for now, companies and consumers will have to cope with the short-term economic pain of the quake's aftermath. Lost production and shipments from the quake area, which accounts for about 12% of gross national product, could pull down first-quarter growth to 1.3%, says Peter Morgan, chief economist at Merrill Lynch Japan Inc.
SPENDING LULL. This could be exacerbated by a propensity of frightened Japanese to spend less. The trend is already showing up in sales in Tokyo department stores, which have fallen 7% to 11% since the quake. But most economists expect just a brief setback followed by extra spending for replacement of the possibly $200 billion worth of damages, adding between 0.3% and 1.5% to 1995 GNP growth and as much as five percentage points to GDP growth over the next five years.
Some experts fret that supply disruptions may fuel inflation and that demand for capital may hike interest rates. But most think that the Bank of Japan will be wary of tightening the money supply, which has been growing. What's more, Japan is in relatively good fiscal shape. It has the confidence of the world's major economies and a low debt level compared to GNP. Says Tod Wood, an economist at Baring Securities (Japan) Ltd: "They will be able to finance this."
Consumer confidence might yet be shaken. "The issue is when the rebuilding stops and people realize the country is relatively poorer," says Masaru Kakutani, a managing director at Moody's Japan. But so would be any country suffering a disaster of this size. Japan is lucky its economy can more or less afford it.