Quiet Rumblings Of Recovery

Amid the current focus on cracks in the banking system, deflation, and yen shock, it's easy to lose sight of the recent stirrings in the Japanese economy. To be sure, a full recovery is a ways off. However, upbeat signs in housing, capital equipment, and public works suggest that the worst is now past.

Some positive trends are even emerging in the household sector, so crucial to a sustained recovery. September retail sales posted a surprisingly solid gain, the second in a row, and quarterly sales grew at an annual rate of 4.9% from the second quarter. Housing starts, fueled by record low mortgage rates and rebuilding in quake-devastated Kobe, rose 6.6% in September, led by the core owner-occupied sector. Spending momentum is carrying over into the fourth quarter. Applications for government mortgages are rising, suggesting future gains in starts, and October car sales rose a solid 9% from a year ago.

These demand trends, if sustained, will support current plans to increase output and capital spending. Companies, especially manufacturers, have revised upward their spending plans for fiscal 1995--ending in March, 1996. As manufacturers restructure in response to past yen appreciation, their profit outlook is improving. The yen's recent weakening is helping to firm up prices at the wholesale level, but deflation is still squeezing nonmanufacturers.

Industrial production, although down in September, may have hit bottom. Manufacturers expect output in October and November to be 3% above the third quarter, but with exports slowing, any recovery in production and employment will be slow. Also, inventories rose in September, and the ratio of stock levels to shipments remained above normal.

On Sept. 20, the government unveiled its 14 trillion yen ($140 billion) stimulus package, 8 trillion of which is earmarked for public-works investment. With the lift it should provide, the economy is generally expected to eke out growth of less than 1% in fiscal year 1995, followed by 2% or less in 1996.

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