Japan's EPA Chief Frowns at the Optimists

Officials are trying to prevent premature overconfidence in the nation's fragile economic recovery.
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TOKYO -- Doth

Taichi Sakaiya

protest too much?

The former novelist, who now heads Japan's

Economic Planning Agency

, has been the principal singer in a chorus of officials warning the markets that the country's recovery is no great shakes. Even as reports mount that the world's second-largest economy may have turned the corner, Sakaiya has said that the government will need to do more to maintain growth. For observers who had become accustomed to hearing bureaucrats say the economy was beginning to look up as it spiraled ever lower, it's been something to see Sakaiya work to dampen expectations of a recovery.

In June, when

gross domestic product

for the first calendar quarter showed a surprising 1.9% gain (it was revised up to 2% last week), the EPA chief was quick to caution people not to get too excited about the quarter's growth, warning it was "premature" to say Japan's economy was back on track. It's a recurrent theme; he has frequently warned that GDP for the March-June period, expected around Sept. 10, may again contract.

Yet economists, after seeing a surprising uptick in consumer spending, have been increasing their forecasts for the next GDP report, and lately "everyone is coming up with about 0%" growth," says Ron Napier, president of

Napier Investment Advisors

. Some are even beginning to suspect the economy will put in a second quarter of growth -- marking an end to the Japanese recession. So why so dour, Mr. Sakaiya?

Conspiracy buffs will note officials have good reasons to talk down the economy. They worry if people get too enthused about Japan, it may unduly strengthen the yen. A stronger yen not only hurts exporters, it also cheapens the cost of foreign-made goods, adding negative pricing pressure to domestic producers. They fear building up expectations of an economic recovery, and then dealing with another crisis of confidence if the economy sinks again. And they fret parliamentarians will backslide on reform, not passing a round of stimulus this fall that would ben (in their view) essential to ensuring the recovery stays on track.

"The government destroyed a decent recovery in 1997," says Richard Jerram, economist at

ING Barings

. "It's decreasingly likely that the government needs to conduct another economic stimulus package, but the government is not taking any chances."

It's easy to see how officials, perhaps not even consciously, would tend to drift toward a more negative assessment of Japan's recovery.

Ron Bevacqua, senior economist at

Commerz Securities Japan

, suspects the government may be "shrewd in setting the market up to be surprised on the upside" and says he has "a hunch there will be some upside surprises" in GDP.

That Bevacqua's GDP outlook is a hunch rather than a forecast is not surprising -- it's an incredibly volatile report, wherein the government is regularly rumored to have borrowed from one quarter to pay up for the next. Groused Jerram in a recent report: "Developed economies simply do not shrink

at an annualized 3.3% one quarter and then grow 8.1% the next, as Japan supposedly has done."

Indeed, the market was rife with talk earlier this year that the government, unable to massage growth out of the October-December GDP figures, had instead made them worse, and then used the surplus to boost the next quarter. If these kinds of shenanigans really do go on, it's possible Japanese GDP will get managed lower to ensure recovery later.

If Japanese GDP

does

come in strong, it could pose some problems not just for officials trying to make sure economic recovery sticks, but for U.S. investors. There has been a lot of worry lately that capital is drifting away from the U.S. Perceived strength in Japan would only make the ebb quicken. What the U.S. market does not need as it faces the demons of October is chatter about a run for the exits.

An odd turn of events, given that last year, everybody was talking about how Japan's failing economy was the big problem.