Tokyo's bustle at odds with fragile outlook

von Michiyo Nakamoto (Tokyo)

Outside the booming Japanese capital there are worrying signs that a recession is on the way.

On any given weekend, the shops in Tokyo's newest retail complexes are bursting with young men and women searching for the latest trendy accessory or queuing for a taste of gourmet chocolates flown in from Paris.

But any evidence of a booming economy belies creeping signs elsewhere in Japan that things are not as hunky-dory as Tokyo's gleaming new buildings might suggest. Outside Tokyo, the streets of many regional towns are filled with shuttered shops instead of bustling crowds.

Housing starts have collapsed, because of tighter standards that were hastily implemented, while sales of trust funds have plunged as the result of new legislation. Wages have meanwhile remained subdued and consumer confidence has dropped sharply this year.

Although there have been hardly any corporate failures large enough to make the headlines, the number of bankruptcies overall has been inching up year-on-year for the past 12 months. Bankruptcies among small and medium-sized companies in particular are up 29 per cent in the first half of the year compared with the same period last year, according to Teikoku Data Bank, an independent research firm.

In perhaps the most worrying sign so far, the government in early November revealed that the index of leading economic indicators hit zero for the first time in a decade. So, after five years of growth, is Japan's economy slowly grinding to a halt?

Recent trends are giving some economists grounds for concern. "The Japanese economic recovery remains somewhat fragile," writes Tetsufumi Yamakawa, chief economist at Goldman Sachs. "The probability of a recession occurring within the next six months ... has not reached the danger level of 60-70 per cent, but it is gradually rising, reaching 40.5 per cent in September."

Japan will not be immune to a downturn in the US and Europe, which is widely expected in the wake of the subprime mortgage problems, although opinions differ on how serious the slowdown will be.

While China and the rest of Asia will continue to provide a home for Japanese exports, that is not sufficient to make up for the slowdown in the west, believes Julian Jessop, international economist at Capital Economics, London.

And as the world economy weakens, there are questions about whether Japanese consumers will be able to take up the slack. The signs are that those outside of Tokyo in general are in no mood to splash out any time soon. For one thing, even though unemployment has been on a downward trend, wages are weak.

Mr Jessop says unemployment has been falling because of the greater flexibility employers have in hiring part-time staff and keeping wages low. "That is not particularly positive for consumer spending," he says.

Furthermore, consumer sentiment is likely to be hit by rising basic goods prices and the weakness of the Tokyo stock market, which has underperformed other leading markets.

Others are more sanguine. "Industrial production figures are still looking pretty good and a lot of the fall in wages has to do with [the one-time impact of the] retirement of the baby-boomers," says Robert Feldman, chief economist at Morgan Stanley in Tokyo.

Mitsumaru Kumagai, senior economist at Daiwa Research Institute, argues that global decoupling is progressing and exports should continue to support the Japanese economy, which closely tracks China's. Wages will recover once the baby-boomers retire, he says. "I believe the Japanese economy will see a long-lasting expansion."

So, while Japan may not be tipping into recession just yet, it will take some skilful navigating by the authorities to ensure the economy avoids losing its way in the gathering clouds.