Japanese developments have been a mixed bag of generally upbeat news from businesses and a blas household sector. Industrial production has grown steadily, business profits and investment rates are up, and overall business sentiment continues to improve. At the same time, personal consumption spending is essentially flat, held back by job market weakness and income uncertainty. In this regard, the end of the year may be influential. Better news this year could get consumers back on track.
Macroeconomic policy continues to frustrate Japanese recovery.
Fiscal policy continues to be used to prop up aggregate demand, although after years of deficit spending it is at its political limit. The Bank of Japan actually raised interest rates slightly in August, even though most economists inside and outside of Japan believed this to be foolhardy. We expect that stabilization of the labor market situation and income growth will underpin some consumption growth in 2001, helping to get Japan on a sustainable private sector led recovery track. But that recovery is unlikely to be robust. On the plus side is Japan s strength in emerging technologies, such as wireless internet services, that could create a more dynamic high tech economy.