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Japan’s Comeback
After years of stagnation, Japan’s economy is back on track with stronger banks, booming exports to China and signs of growing consumer spending.
By Kunihiko Nakao

Kunihiko Nakao President, Northern Trust Global Investments Japan

The availability of golf course tee times may not be a standard economic indicator, but in Japan it offers insight into the extent of the country’s economic prosperity. During years of stagnation, Japan’s numerous golf courses and driving ranges were markedly quiet. Now, as Japan enters its fifth year of economic growth, driving ranges are crowded even on weekdays, and golfers must book at least two weeks in advance for tee times.

As of December 2006, Japan reported 59 months of economic growth of about 2% per year. The length of this expansion surpasses the Izanagi boom of the late 1960s, which turned Japan into a global economic power. Although the country will never resume the heady growth rates of the late 1960s and late 1980s — 11% and 5%, respectively — economists believe Japan has moved past its long period of deflation and stagnation.

The three factors that led to Japan’s long recession — falling land prices, a high incidence of nonperforming loans and a shrinking labor force — increasingly are being addressed by industry and the government:

• Land prices are beginning to rise in the three major cities of Tokyo, Nagoya and Osaka — after dropping more than 80% in these areas during the 1990s.
  
• The government has nationalized and injected funds into banks. In the mid-1990s, as much as a fifth of bank loans was nonperforming, which led to the collapse of four firms. With the reforms in place, banks are more willing to make loans to corporations.
• Increased lending — aided by low interest rates — has helped to fuel capital spending and exports, which are the early drivers of economic growth. Although exports will remain strong, particularly to China, over time the economic drivers will shift to domestic consumer spending.

A few caveats: Investors should watch for slowing exports this year to the United States, where an economic slowdown is possible. Also, it could take years for the Japanese government’s efforts to deal with the country’s shrinking workforce to take effect. And the Bank of Japan is likely to raise interest rates this year.

Consumer spending is the place for investors to watch and invest. Japan’s “baby boomers” — born between 1947 and 1949 — will begin retiring this year when they turn 60. They will have money in their pockets because of lump sum payments equal to three years’ salary upon retirement. They also will have time for leisure activities and hobbies.

Consumption also could rise across other age groups, given that companies will have to begin raising salaries as they compete for workers. Recently, the number of job offerings began outpacing the number of applicants. Salary increases should lead to greater consumer spending — and add to the wait times at driving ranges and golf courses around Tokyo.

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Japan Center for Economic Research (JCER)
JCER is a nonprofit independent research institution established in 1963.

Japan’s Ministry of Economy, Trade and Industry (METI)
METI is a Japanese government ministry overseeing economic activities.