While Japan's structural economic performance has improved, the rate of its economic progress is still modest, according to an analysis by The Conference Board.
"Although Japan benefited enormously from the 'shot in the arm' provided by the surge in industrial equipment exports to China in the 2002-2004 period, this external stimulus has largely dissipated," says Gail D. Fosler, Executive Vice President and Chief Economist of The Conference Board.
"Domestically, employment and wages in Japan have risen for the first time in 10 years and, on its own terms, the economy is much healthier. But in comparison to other industrialized countries, its market growth is still weak. Almost one-third of the eye-catching growth rate Japan recorded last year was due to unusual factors that will not be repeated."
For most of the last two decades, the U.S. business cycle has governed global economics, including Japan's economy, which has tracked closely with the U.S. since the mid-1990s. After the Japanese "bubble" burst as the 1990s began, Japan entered a protracted recession and missed most of the U.S. recovery period. Just as Japan and the U.S. were beginning to recover from Federal Reserve Board tightening in the mid-1990s, Japan was hit by the Asian financial crisis of 1997-1998. Japan also suffered from the U.S. technology collapse and the 2001 recession.
Since 2002, Japan has enjoyed its longest period of positive growth in the past 15 years. But its economy still follows the ebbs and flows of the U.S. economy and is currently suffering as the American economy struggles.
Japan's auto sector now accounts for one-third of U.S. auto market sales. But Japan still depends on exports and, since 2001, has been much more exposed to the Chinese market. Japanese exports to China, which were very small before 2000, make up almost 15% of total Japanese exports, while the U.S. share has declined by nearly the same amount.
Japan's export base increased at a 20% annual rate between 2002 and 2004, with almost a quarter of this growth coming from China. During this period, Chinese imports were growing at about a 50% annual rate, while Japan's exports to China were rising at almost a 60% annual rate.
"China's explosion onto the world economic stage was a huge boon for Japan, which not only benefited in terms of export stimulus, but from a direct source of domestic stimulus to an economy that had struggled to find the momentum to lift itself out of its long-term recession," says Fosler.
But Fosler says much of the optimism about Japanese economic growth may be a delayed reaction to the better than expected performance of 2004-2005 rather than a hard-nosed appraisal of the future. Recently, Japan's machinery export orders and industrial activity have been flat, its profit growth is slowing rapidly and its productivity growth is stagnating. And China's exports, which have been important to all of Asia, are now rising at only about a 15% annual rate.
Some of the improvement in Japan's consumer sector can be traced to a brighter employment and wage picture. Like Germany, Japan suffered a sharp drop in employment in the late 1990s. By 2002, total employment was almost 3 million lower than it was in 1997. Wages and salary income suffered equally striking declines during this period. Since 2003, both wages and employment in Japan have risen. Employment is now up about 0.7 million jobs and the unemployment rate is down to about 4%.
"Still, there is far too little evidence to support the notion that Japan has entered a period of sustained economic growth, and the recent pullback in Japanese stock prices actually provides evidence to the contrary," concludes Fosler.