Mieno gets to grips with grim reality

BANK of Japan Governor Yasushi Mieno's comments this week show that the authorities' economic assessments have moved closer towards the pessimism of private sector economists and, more importantly, closer to reality.

At the end of the quarterly meeting of BOJ branch managers, Mr Mieno retreated from his position of maintaining that the recovery would start to work through in the second half of the fiscal year, to March 1994.

''Domestic demand is not showing clear signs of a recovery, and it is difficult to put the brakes on the trend of declining exports. Thus, there are numerous reports of uncertainty,'' Mr Mieno said with typical Japanese understatement.

It seems that the economy will not kickstart, despite the panaceas to which the Government has turned, including the three stimulus packages this year, interest rate cuts and income tax cuts now expected.

Indeed, the economy seems to be heading down. Capital investment and personal consumption - which account for 60 per cent of gross national product - are obstinately stagnant.

Bankruptcies are running at more than 1,000 a month, and property values - often used as collateral - are still tumbling, implying more bad debts.

Mr Mieno complained that restrictive lending practices by banks, coupled with the strength of the yen, were the main causes of the continuing malaise.

Chris Calderwood, Barclays de Zoete Wedd's Tokyo economist, does not think Mr Mieno is just finding excuses.

''Without the appreciation of the yen from February to August, the predictions of economic stabilisation would have been vindicated,'' he said.

''The second leg [of the so-called 'double-dip recession' after a first-quarter pick-up] was entirely due to the yen compounded by the unforeseeable delays on public spending and the unforeseeable bad weather.'' The delays in public works spending were due to a welter of construction scandals which emerged after the corruption investigation into former political ''godfather'' Shin Kanemaru. They paralysed the awarding of public works contracts.

Merrill Lynch economist Peter Morgan does not think the Government has been ineffectual.

He points to the 10.6 per cent increase in housing starts in September as a response to the decline in interest rates and the increased financing for the government-run Housing Loan Corporation.

But he sees more fundamental reasons for the failure of the economy to pick up.

''The Government didn't really grasp the problem of overemployment due to the downturn in output,'' he said.

The low level of production and sales has led to low wage increases, decreasing summer and winter bonuses and, as a result, depressed demand.

''The income tax cut is a good move in that direction,'' he said.

Mr Calderwood does not think extra measures beyond tax reform, including the expected income tax cuts, are yet called for. After all, he says, public spending is in the pipeline and will work its way through.

''It just means the next six months are going to be pretty grim, that's all.'' Mr Morgan expects to see more of the ''classic fiscal and monetary tools'' of increased public investment, income tax cuts and further interest rate cuts.

''Probably there's not a lot more they can do.'' Fortunately, and paradoxically, as with the delayed public investment, the problems seem to suggest their own solutions.

Deutsche Bank Capital Markets senior economist Kenneth Courtis argued in a research paper this month that Japanese householders had been increasing the proportion of their savings rather than depleting them as they maintained their level of consumption.

That money - equivalent to the amount of real new public investment - is an enormous reservoir of liquidity waiting to be spent, since it earns so little interest, which will be a massive boost to personal consumption.