Why Japan's Economic Good News May Be a Dead-Cat Bounce

Japanese finance minister Kiichi Miyazawa called it "the light at the end of the tunnel": Japan’s GDP grew 1.9 percent in the first three months of 1999 after six straight quarters of contraction. The number was hailed by optimists as a sign that Japan’s moribund economy had finally bottomed out, and U.S. stocks dropped Thursday on the hint that a Japan-fueled recovery of the Asian tigers was on -– and that U.S. inflation (and a Fed rate hike) would soon follow.

Indeed, the announcement was the statistical end of Japan’s longest recession since World War II. But you know what they say about statistics. "There’s not much evidence here of a genuine economic turnaround," says TIME senior economics reporter Bernard Baumohl. "This is a natural reaction to the huge amount of money that has been dumped into the economy by government spending. It may only be a dead-cat bounce."

Baumohl isn’t even sure he can trust the surprisingly robust number on its face. With so much riding politically on Prime Minister Keizo Obuchi’s ability to get his country’s once-proud economic heart beating again, "it’s a bit dubious," he says. "I’m not saying there’s some nefarious plot, but with so much political pressure for a turnaround, some analysts suspect that some pretty optimistic reckoning was used."

And it's not just Japan that has a lot at stake. Still-limping tigers like Korea, Thailand, Indonesia and Singapore need healthy Japanese banks to lend their businesses money, and free-spending Japanese consumers to buy their exports. Japan, in its current state, has neither. The once-emulated economic juggernaut has been reduced to the humiliating status of an export-dumping nation, irking the U.S. profoundly in the process and affording no help whatsoever to its shell-shocked Asian neighbors.