Commentary: "Doctor, I Just Can't Make Myself Spend"

Well, it's official. Japan has fallen into double-dip recession, thanks to a 5.5% annualized contraction in the last quarter of 1999. So Prime Minister Keizo Obuchi should brace himself for another wave of unsolicited advice on how to mend the economy. Spend and spend some more, the Keynesians will say. No, the monetarists will counter--turn on the printing presses, create some inflation, and encourage the Japanese to spend before their money loses value.

This is familiar rhetoric. But perhaps it's time to hear from the psychiatrists. For what really ails Japan is that its consumers are depressed, so depressed they dare not spend. And until something happens to shock them out of this numbed state, it's impossible to see how any kind of robust recovery can occur.

The Japanese refusal to spend is a rational response. Consumer spending makes up 60% of Japan's economic output, and in their guts consumers just don't believe the soothing talk from Tokyo that a recovery is around the corner. The Ministry of Finance's encouraging words fly in the face of what yen-pinching Japanese housewives live with every day: the anxious looks on their husbands' faces over declining wages, bonuses, and overtime pay. And now, there's the persistent fear of being laid off.

BIG SPURT? The squeeze on household income helps explain the collapse late last year. According to HSBC Securities (Japan) Ltd. economist Peter Morgan, a big hit to Japan's winter bonuses caused the worse-than-expected 1.6% decline in consumer spending.

Obuchi's government is quick to point out that its $170 billion spending package launched last November will deliver a big spurt of growth in the current quarter, from January to March. But Japanese households know higher taxes must come to counterbalance that deficit spending. Preparing for the tax hit, households boosted savings 3% in 1999. Savings increased in 1998, too. On top of all this, Japanese families are still burdened with the highest housing costs, electricity rates, and phone charges in the world.

There's no denying that positive things are going on. Japan is starting a merger boom that is transfiguring big industries. The Internet is taking hold, generating a crop of New Economy jobs. But none of this is painless. Some 3 million jobs are at risk in the restructuring wave. Corporate bankruptcies spiked 51% year-on-year in February. That makes Japanese executives focused "on raising returns, not job stability," notes Merrill Lynch Japan Inc. economist Jesper Koll.

No wonder the 50% of Japanese households in the lower tax brackets are struggling. For them, the Obuchi government's vision of a quick rebound is an illusion. Ordinary folk may be glum, but they're not crazy.

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