TOKYO, Feb 19 - The Japanese economy's fastest growth in 13 years in the last three months of 2003 has renewed optimism that the country may finally be ready to throw off a decade of stagnation and live up to its full economic potential. The seven percent annualised growth rate -- outpacing the United States' four percent -- was welcomed by economists, but two previous recoveries in the past decade that have petered out make many cautious about calling the latest one the real thing. "While the economy, with help from robust exports to China, could certainly outperform market expectations this year, whether that will translate into deliverance from Japan's chronic slump remains to be seen," said Ryutaro Kono, chief economist at BNP Paribas.
What a "real" recovery is depends on individual views, but many say that in Japan's case it means a domestic economy strong enough to help the country withstand sudden changes in world trade that can disrupt exports. Exports have long been the anchor of modern Japan's economy, and grew 4.7 percent in 2003 to a record 54 trillion yen ($507 billion). Those to China topped 6.6 trillion yen, also a record. But relying only on exports leaves the economy vulnerable to external shocks, especially at times of slow domestic growth. "The observation that the cycle is not sustaining because it is vulnerable to external events is probably true," said Richard Jerram, chief economist at ING Securities. He argued however that economic growth would continue above trend even with zero export growth because of lingering stimulus from earlier export demand, adding that markets tend to take an incorrect view that a slowdown is the same as a recession. "Does it matter if (the economy) slows down, does it lead to a recession?" Jerram said. "The answer is obviously no. A slowdown to me means you continue to grow comfortably above trend, with all the positive implications for profits and prices that that implies."
RECESSION?
Others however see difficulties ahead. The U.S. economy may slow as the tax cuts that have spurred consumption end, and should China's runaway growth come to a sudden halt, Japan would be left relying on a domestic economy beset by a number of problems. "We see a recession in 2005," said Shuji Shirota, economist at Dresdner Kleinwort Wasserstein. "A slowdown in the U.S. will push down Japan's exports, ending the export-led recovery." He added that rising tax and social welfare burdens and the possibility of slowing demand for digital gadgetry, the driver of the recent growth in consumption, could cut personal consumption, which accounts for over half of the economy. Also hanging over the recovery is the strength of the yen and its effect on exporters, as well as a banking system burdened by bad loans and persistent deflation. BNP Paribas' Kono also noted the possibility of "euphoria about China delivering Japan from its economic malaise," likening it to the exuberance in world markets -- later dashed -- over the technology bubble of 1999-2000. Slowdowns in major export markets would hurt business investment, which grew sharply at the end of last year. That in turn would hurt company profits, and ultimately workers' wages. How such factors make people feel as they go about their daily lives also affect whether a recovery is "real". Although visitors to Japan find its pristine streets, efficient transport and crowded stores packed with the latest goods hard to square with talk of a weak economy, for many Japanese times are harder than they were. Wages haven't risen much in recent years but unemployment has, while a traditional lack of labour mobility has kept many workers trapped in jobs at struggling firms. Improved business for large companies and exporters has also yet to reach smaller firms -- the bulk of Japan's industry -- and less affluent regions, where talk of better times is muted. What many ordinary Japanese think of the recovery may well be summed up by an unnamed middle-aged man quizzed about the growth data on a Tokyo street on Wednesday by a TV news reporter. "There must be something wrong with the figures," he said. ($1=106.57 yen)//