A Shocked Japan Fears Recession Has Already Taken Hold

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A Shocked Japan Fears Recession Has Already Taken Hold

Stephanie Strom New York Times Service Tuesday, June 12, 2001

TOKYO Japan received a nasty shock Monday as a government report showed that gross domestic product dipped in the first quarter of the year when many had predicted at least a modest rise.

Japan's GDP, the total value of goods and services, fell 0.2 percent in the quarter that ended March 31, according to the government's preliminary estimates, suggesting an annualized decline of 0.8 percent and greatly increasing the chances that the Japanese economy has entered another recession.

"I think Japan is now in a recession, given the indicators we've seen over the last three months," said Masaaki Kanno, chief economist at J. P. Morgan Securities in Tokyo. "At best, the second quarter will be flat, and there's nothing right now that suggests a pickup in the third quarter."

Economists spent much of the last two weeks tempering their assessment of the economy, but most of them were still expecting to see growth of about 0.2 percent.

Many had counted on a change in recycling laws that went into effect on April 1 to spur consumer purchases of washing machines, refrigerators and other big-ticket goods in the first quarter, but consumers apparently offset that spending with cutbacks in other areas.

"Even after taking account of that positive factor, consumption is very, very weak," Mr. Kanno said. "And given the deterioration in incomes, it's likely getting weaker."

So is spending by corporations, which pulled Japan out of its last recession a year ago and remained virtually the only source of growth over the last year.

Capital investment fell by 1 percent in the first quarter, in line with a general softening in corporate profitability, and economists do not expect the trend to reverse over the next two quarters, either.

The figures put intense pressure on Prime Minister Junichiro Koizumi and his new government to postpone their plans to overhaul the banking system and force structural reform of the economy by refusing to resort to the sort of old-fashioned pork barrel pump-priming that has kept the economy on its feet over the last decade.

Mr. Koizumi has pledged to keep a lid on government bond sales, but that is hard to do in a recession, particularly since tax revenues are falling below government forecasts.

"This presents a challenge for the new government because it's promising structural reform that won't do a lot to resuscitate the economy in the near term," said Jeffrey Young, an economist at Nikko Salomon Smith Barney. "In fact, they're trying to prepare people for even worse, but it's hard to see how they can stick to a program of fiscal consolidation and banking reform if the economy is already contracting."

Indeed, Mr. Koizumi runs the risk of repeating history if he sticks to his guns. In 1997, Prime Minister Ryutaro Hashimoto undertook to wrestle Japan's undisciplined finances into shape at a similar period of economic weakness and finally had to reverse himself in an embarrassing series of flip-flops that resulted in a temporary tax cut.

Heizo Takenaka, Mr. Koizumi's economic minister and the architect of the new government's economic policy, seemed unconcerned by the economy's poor showing in the first quarter.

"To an extent, it was within expectations," he said at a news conference.

He noted that weakness in the U.S. economy in particular and global demand in general shaved 0.2 percent off overall growth. Exports, which have long buoyed the Japanese economy, fell 3.6 percent in the first quarter.

But Mr. Takenaka insisted that the new data would not require major policy shifts or changes and that traditional pump-priming was not an option because it is no longer effective at prodding the economy into self-sustaining motion.

Government spending increased 5.2 percent in the first quarter as a result of a supplemental budget enacted last November, but the effects of that package are already dwindling, economists said.

Last week, Masajuro Shiokawa, the finance minister, said that the government would consider a similar package if economic growth in the second quarter proved excessively anemic.

Recent statistics on industrial output, employment and consumer spending were all worse than economists had predicted, and inventories posted their largest increase in almost four years, which suggested that other measures of economic activity would continue to fall.

Mr. Takenaka has said that the government stood little chance of meeting its estimate of 1.7 percent economic growth in the year ending March 31, 2002. The weak first quarter numbers Monday ensured that it did not match its forecasts for 1.2 percent growth in the year that ended March 31. Instead, the economy grew 0.9 percent.

The figures kicked off another chorus of demands that the Bank of Japan further ease monetary policy.

Taku Yamasaki, a close political ally of Mr. Koizumi who is secretary-general of the governing Liberal Democratic Party, spoke Monday about the need for monetary easing, and many economists say the central bank can, under the policy it adopted in February, move to increase the money supply should it choose to.

"There is only one way to get the economy back on track now, and that is for the Bank of Japan to increase the money supply, probably by many trillion yen," said Takuro Morinaga, senior analyst at Sanwa Research Institute.

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-- Martin Thompson (mthom1927@aol.com), June 12, 2001


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