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. There's expectation that the current quarter will yield better numbers, but whatever comes through will likely be short-lived. So Prime Minister Keizo Obuchi should brace himself for another wave of unsolicited advice on how to mend a broken 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.

UNCONVINCED. The Japanese refusal to lay out money on goods 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. And the less they believe it, the more vicious the circle of low spending and low growth becomes. 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 over-time pay. For the least fortunate, there's the terrible day when the layoff notice arrives.

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 traditional winter bonuses caused the worse-than-expected 1.6% decline in consumer spending. That drop alone accounted for most of the 1.4% quarter-to-quarter decline in economic activity.

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 are better at math than the government. The day of reckoning is coming when the government will have to cut its deficit. That means higher taxes, and another reason not to spend. Households are bracing for a hike in Japan's 5% consumption tax, higher health care premiums, and a cut in medical benefits. 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. And forget about a quick fix from the Bank of Japan. BOJ officials figure that even if they stage-managed a run-up in Japan's inflation rate--presumably to spur consumers to buy a $1,000 Sony wide-screen television today rather than a $1,100 one next year--it still wouldn't do the trick. Only alleviating consumers' fears, and their economic condition, would.

There's no denying that positive things are going on. Japan is in the early stage of a merger boom that is transfiguring big industries. And the outlines of a robust Internet economy are starting to emerge. The New Economy that's developing will certainly generate jobs for the laid off.

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. Until they start to feel better, forget about a consumer-led recovery. 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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