U.S., Japan and China driving global economy

Kan Tsutagawa, The Daily Yomiuri, Asia News Network, Tokyo

The economy is finally approaching the end of a long deflationary recession. Corporations have regained business confidence, and stock prices are on the rise.

The long winter of hardship is ending and spring is coming to the economy, thanks to four factors that can be called A, B, C and D.

"A" is for America -- the U.S. economy more precisely.

Partly because of U.S. President George W. Bush's large-scale tax cuts, the U.S. economy is steadily recovering, giving a boost to Japan's exports.

Although the U.S. economy has a high unemployment rate as its Achilles' heel, job statistics in March improved drastically.

Prices in the U.S. have stabilized, and an increase in interest rates is unlikely in the near future.

It is likely that the U.S. economy will continue to expand and that the Japanese economy will continue to reap the benefits for the time being.

"B" is for the Bank of Japan -- specifically its monetary policy. When Toshihiko Fukui took over as governor a year or so ago, he implemented a dramatic easing of the money supply, which has contributed immensely to stabilizing the financial system.

The central bank's easy-money policy and large-scale intervention in foreign exchange markets by selling the yen and buying the dollar has had a synergic effect. As a result, the Japanese economy has finally found a long-awaited way out of deflation.

"C" is for the Chinese economy.

Until recently, many Japanese business leaders and economists saw China as a threat to the nation's economy, believing the massive inflow of cheaper Chinese products into Japan was the main cause of deflation.

However, China's rapid economic growth, at a pace of about 9 percent a year, has resulted in massive imports from Japan, which has given Japanese industry a boost.

Many Japanese companies -- including steelmakers and manufacturers of chemical products and other materials, firms that assemble electrical appliances and automobiles as well as service companies -- have been able to recover thanks to China's rapid economic growth.

The China factor has been the main engine of the recent recovery of the Japanese economy.

In the past, the Japanese economy has often been pulled out of recession solely by the locomotive of exports. But the recovery this time is different in that there are two engines -- exports to the U.S. and those to China.

And "D" is for digital technologies, which are continuing to advance.

Japan leads the world in the field of consumer goods incorporating digital technologies, represented by the three new hot sellers -- DVD recorders, thin-screen television sets and digital cameras.

As there are many major events scheduled for this year, such as the Athens Olympics, demand for digital consumer goods will continue to be brisk, contributing to an increase in personal spending.

Makers of domestic electrical appliances and other firms are making capital investments in Japan for the production of semiconductors, plasma displays and liquid crystal displays.

The companies are making the investments domestically because they fear an outflow of their advanced technologies.

This return of production to Japan also is contributing to economic recovery.

These four factors have pulled the head of the Japanese economy above water. The question now is whether they will continue to be effective.

The U.S. economy probably will continue to grow. But if the U.S. government tightens fiscal and financial policies after the presidential election in autumn, a slowdown will be unavoidable.

Any rise in interest rates would directly hit U.S. households by increasing housing loans and other debts, causing consumption to shrink.

The Bank of Japan's unprecedented easing of money supply will have to end sooner or later.

When interest rates begin rising as a result of economic recovery, it no longer will be possible to pour a limitless amount of money into the market.

How will companies and banks react to an increase in interest rates? It is much harder to react to the end of an easy monetary policy than react to the start of one.

The Chinese economy is saddled with the fear that too rapid an expansion may result in the economic bubble bursting in the near future.

If reforms in Japan, especially of the public pension systems, fail to erase people's anxieties, households will once again tighten their purse strings. In that event, demand for digital consumer goods and other new products will shrink.

Demand for semiconductor chips, which are widely used in digital consumer goods, is currently rising at a very fast pace. But some business indicators suggest this growth may slow in the latter half of the year.

Can the Japanese economy overcome these negative factors, bid farewell to the deep recession that has lasted for more than 10 years and get on track to a full-fledged and long-lasting recovery?

The economy is at a crucial stage.

Prime Minister Junichiro Koizumi has emphasized that economic growth is impossible without reforms. But the current economic growth is not a result of his reforms.

Reforms of road-related public corporations and post offices remain half-finished. Any drastic fiscal reform and radical reconstruction of the banking industry would in fact have negative effects on the economy.

The current economic recovery was a result of the government and the Bank of Japan taking extreme measures in their financial and foreign-exchange policies. It was not a result of the government's fiscal policy, which had exhausted all its options.

Another decisive factor in the recovery was Heizo Takenaka, state minister for economic, fiscal and financial policy, temporarily shelving his hard-line position in dealing with the financial troubles of Resona Bank.

Takenaka shifted to a realistic position by deciding to give the bank taxpayers' money without requiring shareholders to take responsibility for the results.

In short, the current economic recovery was not brought about by accelerating reforms, but by slowing them down.

After climbing out of the recession on the backs of the ABCDs, the road to full-fledged economic recovery depends on upon following two Rs: A reflation policy centered on financial and foreign exchange policies, and realism in implementing structural reforms.