Hopes for an investment recovery are based on a sharp surge in key private machinery orders during January and December that lifted those orders to a level that was 21 percent above a year earlier. The signs of a pickup in production were reinforced by a strong industrial production report in January that showed output 7.2 percent above levels a year earlier. But while Japanese producers are picking up the pace, Japanese consumers remain passive, fearful of the malaise in the banking system and the attendant persistence of deflation. January consumption was 4.3 percent below its level a year earlier following a negative 6.3 percent annualized growth rate during the fourth quarter of 1999. Retail sales, a large component of consumption, have fallen for thirty-four months in a row.
Japanese consumption is also weak because employment continues to fall.
Even the slight pickup since November 1999 in the ratio of job offers to job seekers, tied to stronger activity in Japan s information technology and export sectors, has failed to dispel the prevailing gloom among Japanese households. The restructuring effort in many Japanese companies that is responsible for improved profits and consequent machinery orders to replace labor is part of the reason that Japanese households are so concerned about the outlook for jobs and incomes. The government s incessant use of fiscal stimulus packages and the attendant fear of higher taxes in households that see soaring government budget deficits have also depressed consumption spending to a degree that additional stimulus packages may actually subtract from aggregate demand growth. The stock of marketable Japanese government debt now totals more than 120 percent of GDP, or over 600 trillion, the highest such ratio among the G-7 major industrial countries. The extraordinary burden that Japan s government finances place on the economy will not end soon.