Japan still gloomy despite growth

By Mariko Oi
Reporter, BBC Asia Business Report

Shoppers in Japan are still being careful with their money

"It does not feel like things are improving at all," said housewife Mayumi Kuronuma in Tokyo.

Japan's economy grew 0.9% in the three months to June, compared with the previous quarter.

This ends a four-quarter contraction that sent the world's second largest economy into its longest recession since World War II.

But people are not feeling the recovery.

"I am still very careful with money when I do my grocery shopping," Mrs Kuronuma added.

"My children complain about how tough things have been at work. I feel sorry for the younger generation.

"We do not feel optimistic about the future at all."

Rural bankruptcies

Things are even bleaker in the countryside.

Nobue Higashikawa and her family run a lumber business in Mie prefecture.

"It has been going for a few generations but it is likely to end in ours," she said.

"All the other lumber businesses in the area went bust in the last year."

This year, 9,555 firms filed for bankruptcy in Japan. Eighty-two of them are in the small prefecture of Mie.

"Bankruptcy in rural areas has reduced slightly after the government implemented the Emergency Guarantee Programme in October," said Masashi Seki of Tokyo Shoko Research.

"But that was a Band-Aid policy. We are seeing bankruptcy in rural areas rising again in recent months."

Export driven

"Things remain tough for ordinary people in Japan," said JP Morgan senior economist Masamichi Adachi.

Japan's carmakers have benefited from a government scrappage scheme

"The economic recovery was purely driven by stimulus packages and exports."

Appetite for Japanese cars is slowly recovering around the world, thanks to government schemes to encourage people to replace their old cars.

The world's biggest carmaker Toyota narrowed its full year loss. Its smaller rival Honda also raised its forecast for the year.

Overall exports grew 6.3% in the second quarter from the previous three months.

That has reduced stockpiles of goods and encouraged firms to start producing again.

Industrial output increased by over 8.3% in the three months to June - a sharp rebound from the record 22.1% fall at the start of the year.

Consumers are also starting to spend, thanks to the stimulus package worth $260bn (£159bn).

The government currently subsidises energy-efficient cars and home appliances. The package also includes tax cuts and loan guarantees for small companies.

Jobs concerns

The nation's embattled Prime Minister Taro Aso said his policies had helped the country out of recession.

"Since I became prime minister, I have done my best on economic measures," Mr Aso said during a televised debate with five other party leaders.

"As a result, we have seen some signs of a brighter future for the economy."

But a deteriorating jobs market is likely to undermine consumer spending. The unemployment rate continues to rise and is expected to hit a record 5.8% next year.

"We are still cautious whether this recovery is sustainable," JP Morgan's Mr Adachi added.

Election pending

The change in government may be on its way.

The main opposition Democratic Party (DPJ) has its best ever chance of winning on 30 August.

A DPJ victory would be a watershed in Japanese politics.

The ruling Liberal Democratic Party has been in power for more than half a century apart from a single break of less than a year.

But voters are not excited.

"I will vote for the DPJ just because I think we need some fresh air," said Mrs Higashikawa from her lumber business.

"But I do not expect them to do anything that different from the LDP, once elected."

"They publicise ambitious plans during the election campaign, but some of their policies seem unrealistic."

The DPJ wants to spend up to $58bn a year on child allowances by putting money directly in the hands of parents.

Lawmakers hope it will encourage couples to have more babies. This would be the boldest effort to tackle Japan's low birth rate and ageing population.

The party also wants to eliminate road tolls and cut petrol taxes. Other spending pledges include pension guarantees, higher medical spending and income subsidies for farmers

"I just wonder how they will finance them all," said Mrs Higashikawa.

Especially because the DPJ would inherit an unemployment rate near a post-war high and a public debt twice the size of GDP.

Japan may have come out of recession, but some analysts and the business people fear an untried DPJ government could lead to instability at a crucial time for the economic recovery.