South-Western College Publishing - Economics  
The Sun Could Be Rising
Subject Recession, Economic Growth
Topic International Finance
Key Words Recession, Gross Domestic Product, Economic Growth
News Story

Evidence continues to mount that the Japanese economy is recovering from its longest post World War II recession. Japan's gross domestic product (GDP) increased for the first quarter of 1999 by 1.9 percent, a 7.9 percent annual growth rate. Unemployment fell to 4.6 percent in May from a record high of 4.8 percent in April. Consumer spending jumped 3 percent from April to May and the economies of Japan's Asian trading partners are also showing signs of an economic recovery. In spite of all this welcome news, neither Japanese officials nor the public appear to be optimistic about the future.

Not all of the economic news is good. Japan's banking system continues to be a sore spot, as potentially bad loans rose nearly 11 percent to more than $235 billion in fiscal year 1998. Industrial production dipped .7 percent from April to May and even though the unemployment rate decreased, the offers-to-applicants figure, a measure of future job growth, decreased in May. Although a weaker yen would help exports, the Japanese central bank continues to support an exchange rate of 120 yen to the dollar. First-quarter growth was propped up by massive government spending and many economists doubt whether the government can afford to keep spending at that rate.

Japan has been slow to restructure its economy. While U.S. companies earned a 24.2 percent return on equity in 1997, Japanese firms earned 3 percent. Increased competition and shareholder unhappiness have prodded Japanese companies to announce restructuring efforts. However, these restructuring efforts generally are being effected by voluntary retirement and attrition rather than job cuts, a generally slow process.

Whether Japan's gross domestic product will increase this year is uncertain. While government predictions are for a .5 percent growth, some private analysts predict the economy to finish down by .5 percent. Whatever the short-term outcome, the long-term growth requires significant changes in the banking and industrial sectors that are proceeding only slowly.

(Updated August 1, 1999)

Questions
1. While recent data show improvement for Japan's economy, the article points to a number of trouble spots.
  a) Reports indicate that the banking sector is a particular trouble spot. What role does the banking sector play in the economy? How would an excessive amount of bad loans impede economic performance?
  b) Japan's industrial sector has been slow to implement restructuring. What impact would job cuts have on the firm? What impact would job cuts have on the macro economy?
2. The government has supported consumer spending by a variety of policy measures. How do changes in consumer spending and business investment affect GDP?
3. Japan's is supporting the yen, that is, not allowing the value of the yen relative to the dollar to depreciate. What would happen to exports and imports if the yen did fall?
Source Paul Wiseman, "No joy despite jump in Japan's economy," USA Today, July 7, 1999.

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