Syd 21:47 GMT June 12, 2005
Tokyo -- GROWTH IN JAPAN has long been linked to strong exports. Four decades ago, Japan emerged as an electronics and auto export power. More recently, strong shipments of machine tools and components to factories in China helped Japan to recover from a decade-long slump. On an annualized basis, real exports grew 20% in the January-March quarter of 2004 and 13% in the following three months.
But since late last year, that fast growth has become a thing of the past -- and so has Japan's robust overall growth. In the third quarter of 2004, exports rose only 1.3%, followed by 2.3% in the fourth quarter and 2.6% in the first three months of 2005. And as export growth slowed, the economy as a whole stopped growing last year: A couple of quarters of below-zero growth put it technically in recession.
Consumer spending helped to fuel healthier growth early this year, but the recent trend in exports has economists worried. They're trying to figure out if the export slowdown will continue for much longer. If it does, could that send Japan back into recession?
Economists are concerned about last year's export slowdown, which came even as Japan's biggest markets continued to turn in solid growth. China, which combined with Hong Kong is Japan's biggest trading partner, recorded 9.5% economic growth for 2004. However, Japan's export growth to China slowed to a modest 5.3% in the first quarter of 2005, compared with the same quarter the previous year, following a 24% increase in the first half of 2004 and 18% in the second half. In particular, Japan started exporting less industrial machinery from the summer of 2004, while basic materials -- chemicals, steel and nonferrous metals -- peaked later in the year.
There are a handful of possible reasons for the slowdown, economists say. The most problematic for Japan: China could be expanding its capital production, meaning it has to import fewer basic materials from Japan. Such a structural change could damp Japan's exports in the long run.
What's more, the Chinese government's efforts for the last year to tap the brakes on growth may have cut into some investment in factories and construction, thus reducing demand for Japanese goods.
But there may also be some cyclical factors. China imported more products -- especially automobiles -- in the first half of 2004. But that created a temporary glut in inventory, which meant fewer new orders.
As exports to China slowed, Japan was also hit by a slowdown in the high-tech industry in the rest of the world, which led to fewer exports of electronics products in the second half of last year.
Such cyclical slowdowns are often followed by a bounce back, says Kiichi Murashima, chief economist at Nikko Citigroup in Tokyo. What's more, he says, there are other regions where Japanese exports remain strong, such as vehicle exports to the U.S. Exports of electronics products to Asian countries other than China are also starting to pick up.
"My view is that exports will recover moderately," he says.
If the export slowdown is only temporary, that would be good news for the Japanese economy, as stronger exports would provide an important engine of growth. In addition, they would fuel investment in capital equipment, as manufacturers prepare their factories to produce more.
Still, the timing of a potential bounceback is uncertain. Much depends on the U.S. economy, which is the final destination for many goods made in China using Japanese components and machine tools.
"For the moment, U.S. growth in the first quarter was weak, which means Japanese exports won't increase over the next few months," says Satoru Ogasawara, an economist in Credit Suisse First Boston's Tokyo office. "I thought they would recover from the middle of this year. But it will probably not happen till later -- the second half of the year."
There is one scenario for Japan's economy even better than a recovery in export growth: for consumers to spend more, making Japan's overall growth less reliant on exports.
Traditionally, Japanese consumers have been too cautious to spend like Americans. Recently, however, the savings rate has undergone a long-term decline. That is partly because of demographic shifts, as the number of retired people -- who gradually spend away their savings -- increases. But economists say it may also be linked to relief that the so-called lost decade -- the period throughout the 1990s when Japan was constantly mired in recession and teetering on the brink of financial meltdown -- appears to have ended.
Consumption, in fact, drove 5.3% annualized economic expansion in the January-March quarter, despite the drag from slowing export growth, according to the government's preliminary estimate. (A revised figure was scheduled for release today.)
"Over the past seven or eight years, the growth of exports was critical, and there's a perception that if exports don't go up, it's impossible for the economy to grow," says Richard Jerram, chief economist, Macquarie Securities. But, he says, "it looks decreasingly important whether exports go up or not. The last few months have shown that you can get some domestic dynamism."