Will Japan's Nervous Consumers Join The Party?
The staying power of Japan's nascent recovery will turn on consumers such as 35-year-old Atsushi Nara. Until recently, Nara and his wife, Shuko, and their two children clutched every yen. But their mood changed last year as interest rates touched historic lows and land prices settled at some 60% below their airy peak in 1991. The couple spent $470,000 on a new suburban Tokyo home and a considerable sum on furniture, and recently dropped an additional $20,000 on a new Nissan Skyline.
While such outlays hardly herald a return to the conspicuous consumption of the 1980s, Japan's consumers are showing a new willingness to open their purses (table). The extent of their spending--they account for 60% of the Japanese economy--is critical. In early February, the government cited rebounding industrial production, improving capital expenditures, and a rallying Nikkei 225 stock index as clear signs of a recovery. The economy is on track to grow 2% in 1996, but it's being driven primarily by $500 billion in pump-priming measures since 1992, improved corporate earnings, and business investment. In short, growth is tethered to the production side of the economy. For the recovery to have real legs, consumers must join the party.
Even folks such as Nara, a service representative with Hewlett-Packard Japan Ltd., still have some qualms. He's troubled by Japan's record-high jobless rate of 3.4%. "Although that's low by Western standards," he says, "we can no longer expect traditional lifetime employment in Japan."
Lifting such lingering doubts is a key preoccupation of Prime Minister Ryutaro Hashimoto, who is widely viewed as someone who can get the economy rolling. There are reasons to think he'll succeed. True, consumer spending dipped in November and December and personal bankruptcies are up. Yet consumer prices have been flat, while disposable income is growing--about 1.8% in the fiscal year ending in March. That's why Barclays de Zoete Wedd Research Ltd. economist Chris Calderwood sees consumer spending rebounding 2.5% in '96 and 3.2% in '97, which would be the highest level since '91.
Consumers are getting a big boost where it matters most--in their bank accounts. The weakening of the yen from 80 against the greenback last April to 106 on Feb. 14 played a key role. It's a boon for corporate earnings, which are expected to jump 21% this year. In turn, that takes some pressure off companies to trim payrolls further and ensures modest growth in annual bonuses, which often represent four to five months' pay and are a key part of most salarymen's compensation. "I believe the domestic economy has seen some brighter signs," says Akira Kobayashi, 34, an executive with Eiwa Trading Co. He is expecting an increase in 1996 in his $19,000 annual bonus, and plans to remodel his home later this year.
A wave of imports--from Asian-made color-TV sets to U.S. software and personal computers--has helped drive down consumer prices across a broad front. With inflation negligible, consumers have plenty of spending power. And though declining land prices have hurt Japanese banks and real estate speculators, the slide plus near-zero interest rates have propelled the housing sector forward.
BIG GAIN. Consider the rebound in sales of condos. The price of an average-size, 70-square-meter unit is down to $390,000--a bargain by Japanese standards. "High-quality condos at convenient locations are now affordable," says a spokesman with condo developer Daikyo Inc., which expects an 18% jump in sales over the next 12 months.
Consumers are also once again streaming into Japanese auto showrooms looking for bargains. The auto makers logged a 5% gain in domestic sales last year, the first gain since 1990. Many buyers are driving away in economy models in the $10,000 price range. At Nissan Motor Co., which is expecting 20% sales growth in 1996, such low-priced sedans as the March and Sunny are selling well. A pickup in "consumer spending has started to brighten our recovery outlook," says Tokyo-area Nissan dealer Kozo Nakazawa.
Still, the better times don't mean a spending free-for-all. For starters, the recovery under way will be far below the average annual 7.6% bounce-back experienced in Japan's past eight post-war recessions, notes Morgan Stanley & Co. economist Mineko Sasaki-Smith. The reasons: stalled deregulation and Japan's banking mess. What's more, even the most profitable Japanese multinationals are still keeping a sharp eye on costs for fear of another bout of yen appreciation down the road.
So far, most of the job losses have fallen on members of the 50-plus crowd who have taken buyouts and on newly minted college graduates hit by hiring freezes. Should Hashimoto get serious about deregulating the economy, bigger job cuts might start showing up in such long-shielded sectors as midsize manufacturers, wholesale distributors, and mom-and-pop retailers.
If jobs start to vanish, the already frugal Japanese--who save 13% of their annual income, vs. 5% in the U.S.--could pull back in a big way. "For corporate profits to improve more, restructuring is unavoidable," says schoolteacher Keiko Yoshida, 24. She may splurge on a weekend ski trip this winter, but that's about it.
The trick for policymakers is to make sure the rebound in consumer spending isn't cut short by the cleanup of the banking mess, and that uncompetitive domestic companies are brought back to health without instigating massive job losses. It's a high-wire act. Yet if the urge to splurge can be brought back to consumers, Japan may at last be on the way to a sustained recovery.