German and Japanese economies ( 2003-11-19 14:51) (Economist.com)
Lands of the cautiously rising sun
Is Germany's economy following the path of Japan's? Until recently
that prospect brought fear. Now it brings a glimmer of hope.
Germany has spent the past year or so hoping to avoid
becoming the next Japan. Disappointing growth, dilatory monetary policy,
dysfunctional banks and the prospect of deflation all suggested that Germany
might be heading for a long period of economic stagnation like the one Japan had
been suffering until recently. But now the prospects of both countries—the
world's second and third largest economies, respectively—are looking less
gloomy. Spurred by rising exports to a recovering world economy, Japan's real
GDP grew at an annualised rate of 2.2% in the third quarter, according to
figures released on Friday November 14th—the country's seventh consecutive
quarter of growth. Germany, mired in recession since last winter, is now being
pulled along by the same global recovery. According to figures released last
week, its economy grew by 0.9% in the third quarter (at an annualised rate)
after shrinking for three quarters in a row. Perhaps following in Japan's
footsteps is not so bad after all.
This cyclical turnaround should not obscure the deeper problems that still
beset the two economic giants. Japan still suffers from "stubborn" deflation, in
the words of Heizo Takenaka, Japan's financial-affairs minister. The country is
producing more, but the prices it can fetch for those products are falling just
as quickly. As a result, in nominal terms, Japan’s economy actually shrank in
the third quarter. Such stubborn deflation makes life harder for borrowers. On
Friday, Japan's Financial Services Agency said that the country's big banks
ought to set aside ￥900 billion ($8.3 billion) to cover losses on loans.
Stockmarket investors, who have been betting on a recovery for most of this
year, took some of their chips off the table on Monday, bringing the Nikkei
average below 10,000 for the first time in three months.
The German recovery is heavily reliant on foreign demand. Europe's titan has
been waiting supine for America to pull it out of trouble. Foreign orders for
German manufactured goods shot up in the third quarter by 8.9% at an annual
pace. Domestic orders grew by only 1%. Germany is good at supplying other
countries’ investment booms, not so good at generating one of its own.
Both countries remain vulnerable to a falling dollar. The euro has
strengthened by 35% against the dollar in the past two years. The yen has
strengthened to 108 to the dollar, from around 120 in the summer. Many Japanese
exporters, such as Sony, plan their operations on the assumption the yen will be
no stronger than 115 to the dollar. They can take some comfort in the knowledge
that the Japanese authorities, which have already spent over ￥13 trillion this
year trying to keep its value down, will do their best to slow any further
appreciation. But the European Central Bank will not sell one single euro to
help out Germany's exporters.
Both economies, once widely-admired growth machines, are now in need of
fundamental re-engineering. But the will to reform is frustrated by the dead
hand of the past. Both countries have ageing populations, a bloated capital
stock, and vested interests opposed to change. In the eyes of some, to tinker
with the economic model is to risk dismantling the social order.
On November 9th, Japanese voters risked a little tinkering with the political
order. They gave the opposition Democratic Party of Japan (DPJ) 40 extra seats
and, by doing so, gave the ruling Liberal Democratic Party (LDP) its first
serious challenger in half a century (see second chart). In general, of course,
the opposition’s job is to oppose. But what if the opposition is more radical
than the government? What if it wants to do more, faster? Junichiro Koizumi's
government strikes some radical notes, but the chief opponents of his reforms
belong to his own party: the political patrons of the post office he wants to
privatise or the rural constituencies he wants to stop subsidising. In this
respect, his position is similar to that of Gerhard Schroeder, Germany's
chancellor. His wish to reform the country's labour laws and welfare benefits is
largely shared by the opposition Christian Democrats (CDU) and Christian Social
Union (CSU), while being opposed fiercely by elements of his own Social
Democratic Party (SPD).
Many Japan-watchers hope that a stronger opposition will embolden Mr Koizumi.
The DPJ and Mr Koizumi's wing of the LDP must now compete for the reform mantle.
In this, the parallels with Germany may again be instructive. Mr Schroeder
promised great things when running for his first term as chancellor, won easily,
and then failed to deliver. He only just squeaked through to re-election last
year, and, faced with a strengthened opposition, his spine has stiffened. He has
staked his political future on forcing through a raft of reforms dubbed Agenda
2010.
By stealing their best tunes, Mr Schroeder has put the opposition in an
awkward spot: if they oppose the government, they will stymie reform; but if
they back reform, they may bolster the government. In the Bundesrat, Germany's
upper house, the CDU-CSU alliance has a majority. This gives it the power to
block and delay Mr Schroeder's Agenda 2010 at will. Earlier in the year, the
opposition chose to co-operate with the chancellor on his health-care reforms.
But when presented with Mr Schroeder's proposals to streamline unemployment
benefits and cut taxes by EURO 5.6 billion ($17.9
billion) next year, it was more than they could bear to help him a second time.
Their no vote on November 7th has consigned Mr Schroeder's proposals to the
purgatory of the "mediation committee", where the two houses must hash out a
compromise over the next month. Before then, Mr Schroeder must endure purgatory
of a different kind at what promises to be a fractious SPD party conference
beginning on Monday November 17th. Dealing with the official opposition may be
easy by comparison.
Germany has spent the past year or so hoping to avoid
becoming the next Japan. Disappointing growth, dilatory monetary policy,
dysfunctional banks and the prospect of deflation all suggested that Germany
might be heading for a long period of economic stagnation like the one Japan had
been suffering until recently. But now the prospects of both countries—the
world's second and third largest economies, respectively—are looking less
gloomy. Spurred by rising exports to a recovering world economy, Japan's real
GDP grew at an annualised rate of 2.2% in the third quarter, according to
figures released on Friday November 14th—the country's seventh consecutive
quarter of growth. Germany, mired in recession since last winter, is now being
pulled along by the same global recovery. According to figures released last
week, its economy grew by 0.9% in the third quarter (at an annualised rate)
after shrinking for three quarters in a row. Perhaps following in Japan's
footsteps is not so bad after all.
