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Japan's Economy Shrinks

By Ritsuko Ando

Japan's recession deepened in the final quarter of 2001 as business investment logged its biggest quarterly fall on record, putting pressure on Prime Minister Junichiro Koizumi to speed up plans to restore growth.

Gross domestic product, the broadest gauge of the economy's health, shrank 1.2 percent in the quarter, worse than economists had expected and the first time in nearly a decade output has fallen three quarters in a row, government data showed on Friday.

The slide translated into an annualized 4.5 percent fall, bigger than the 4.0 percent forecast on average by economists.

"It's a very serious recession," said Takashi Kiuchi, economic adviser at Shinsei Bank.

For all of 2001, the economy shrank 0.5 percent -- its first full-year contraction in three years.

Economics Minister Heizo Takenaka said the downturn may have hit bottom in the final three months of last year but that an official government target for one percent growth in the current fiscal year to March 31 was now in jeopardy.

"I hope that the economy will be looking to bottom out," Takenaka said. "I don't get the impression that the bad conditions accelerated further than in October to December."

The figures reflected the full impact on the world's second-biggest economy from the September 11 attacks on America and a confidence-denting outbreak of mad cow disease in Japan.

Business investment fell 12 percent in the quarter, its biggest slide ever under calculations dating back to 1980.

Some economists saw hope in a 1.9 percent rise in personal consumption, the biggest and most stubbornly weak area of the economy. Its strength is considered a crucial fuel for any rebound from Japan's third recession in a decade.

Other more recent evidence suggests consumers may be slowly loosening their purse strings. In January, for example, average household spending rose 0.8 percent from a year ago despite rising unemployment and widespread pay cuts.

"I am surprised to see a rise in private sector consumption. But I don't expect this figure to stay strong; I think it is probably merely a rebound from the previous quarter," said Seiji Shiraishi, market economist at Daiwa Securities SMBC.

Japan's financial markets dismissed the GDP as "old news" and continued a week-long rally on hopes of an export-led upturn on the heels of a recovery in Japan's biggest trading partner, the United States.

Tokyo's Nikkei 225 average leapt 3.1 percent to pass through the 12,000 threshold for the first time since August 9, while the yen hovered near 11-week highs after its biggest jump in two years on Thursday sent alarm bells ringing in the government.


Vice Finance Minister Haruhiko Kuroda said the currency's 2.5 percent rise against the dollar on Thursday was too fast. "Movements in exchange rates in the past several days have been too rapid and do not reflect economic fundamentals," he told reporters. "It is a bit too abnormal...and not appropriate."

A stronger yen could undermine the government's work in engineering a sharp drop in the currency last year to bolster the offshore earnings of major exporters like automaker Honda Motor Co, whose earnings soared to a record in October to December.

"I am watching the market movements with vigilance and will take appropriate action if needed," Kuroda said.

Japan's GDP last contracted for three straight quarters in 1993, but the drop in two of those quarters was smaller than 0.01 percent, making the current downturn the deepest since the dark years following the end of World War Two.

The deepening recession raised pressure on Koizumi to unveil stronger steps to restore economic growth in a second installment of anti-deflation steps expected as early as April.

"The GDP was poor, as expected. Having seen such a big decline, the government may have to come up with stronger measures to fight deflation," said Takeshi Minami, strategist at UFJ Capital Markets Securities.

Deflation, blamed by the government for crippling the banking system, stifling growth and restraining consumer spending, appeared to worsen in February, separate data on Friday showed.

Wholesale prices fell 1.3 percent from a year earlier -- the 17th straight month of decline.

Koizumi mounted an anti-deflation crusade last week but has drawn criticism for focusing too much on shoring up the stock market to help Japan's ailing banks avoid massive losses on their shareholdings at the March fiscal year end.

What's needed, economists say, are structural reforms to tackle the root cause of deflation -- excess capacity wrought by years of protectionism and over-investment in industries such as construction and retail.

Credit-ratings agency Moody's Investors Service this week threatened a drastic two-notch downgrade in Japan's domestic credit ratings, citing the impact of deflation.

But Koizumi's ability to drive through economic reforms is now in doubt following a sharp fall in his popularity among the public since he sacked his popular foreign minister in January.


The latest GDP figures mean the economy must now grow 1.6 percent in January-March to meet the government's humble forecast of a 1.0 percent contraction in fiscal 2001/02 ending March 31 -- the first fiscal-year contraction since 1998/99.

In July-September, GDP shrank by 0.5 percent and in April-June 1.2 percent.

Apart from the upbeat news from the United States, signs that the fall in Japan's exports is bottoming out and inventories are falling, have injected a note of optimism into the economy.

Reflecting this, the Nikkei has rebounded 27 percent from an 18-year low on February 6, while the yen has climbed for the past six days against the dollar and government bonds have risen.

But serious structural problems remain, particularly in the banking sector which is groaning under a mountain of bad debt exacerbated by three years of falling consumer prices.

Underscoring the weakness in the economy, figures released on Friday showed bank lending fell 4.6 percent in February from a year earlier, the 50th consecutive month of decline.

The government has compiled two extra budgets worth more than $39 billion for the current financial year and the Bank of Japan has kept interest rates near zero for almost a year in an effort to get things moving.

The scope for further help from fiscal or monetary policy is limited, however, and economists say high and rising unemployment will continue to subdue private-sector consumption, which accounts for nearly two-thirds of GDP.

The government projects zero economic growth for the financial year starting on April 1.

($1=130.66 yen)

source: Reuters, 08/03/2002


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