The question now is of course if growth will continue to increase, or in other words, if the bad years are truly behind us. After twelve years with a series of recessions, and without any really strong growth inbetween, many investors both in and outside Japan are still sceptical. But there are positive signs in the latest statistics.
Unemployment fell to 4,9% in
December, down from 5,4% in May, and the ratio between the number job offers and job applicants rose in December to the highest level for over ten years. The underlying cause of many of the economic problems in Japan, the persistent downward trend in prices of both goods and services (deflation), has eased gradually. Exports from Japan in volume were 13% higher in December than a year earlier and the trade surplus expanded by an impressive 40%.
A stronger economy in general does not by itself solve the main problem for the biggest sector on the Tokyo Stock Exchange, the banks. The volume and value of the non-performing loans, with roots in the real estate bubble in the late 1980-ies, is still unclear. Optimists point to the official statistics that show that the volume is going down and that bank profits have grown so that they will cover the remaining losses in just a few years. Pessimists argue that the official statistics understate the problem and point to the reclassification of loans done when Resona Bank was rescued by the government in May.
Now investors nervously wait for new information that will show which side is correct. Both information from the banks themselves and political reforms of the banking sector will probably be released suddenly, since the Tokyo Stock Exchange is highly sensitive to both the volume of bad loans and how they are handled.
Another reason for concern is exchange rate movements. After staying between 115 and 120 yen per dollar during the first eight months of 2003, the yen has appreciated strongly, despite record large interventions by the Ministry of Finance. During January it purchased 67 billion dollars, but the dollar still fell below 106 yen. Fundamentally this matters less than a few years ago, since Japanese exporters have moved production abroad, but 100 is still considered a vital psykological threshold. If the dollar falls below 100 yen, many fear a strong reaction in the equity market that would once again hurt the balance sheets of Japan's shaky bank.
A support so far has been expectations of structurall reforms, created by election promises during 2003. Prime Minister Junichiro Koizumi was reelected by the ruling LDP in September and promises of economic reforms dominated the lower house election in November. The result was a stronger position for the reformers, but it still remains to be seen how many of the election promises that will be realized.
