Japan

["Ian Murray" <seamus2001@xxxxxxxx>]

Japanese Report Adds to Global Economic Fears


By Paul Blustein and Akiko Kashiwagi
Washington Post Staff Writers
Friday, September 7, 2001; Page A01


The global economic outlook darkened this morning as Japan announced
that its economy shrank sharply in the second quarter, a day after
stock markets in Europe plunged to two-year lows.

Japan's gross domestic product declined at an annual rate of 3.2
percent in the April-June quarter, affirming widespread predictions
among private economists that the nation's economy is sinking into its
third recession of the past decade.

The simultaneous arrival of bad news and surge in market pessimism in
Japan, the European Union and the United States, where markets
yesterday hit their lowest levels since April, were the latest
manifestation of a worldwide economic slowdown.

The slump is particularly worrisome to economists and policymakers
because it is "synchronized" - that is, afflicting the world's biggest
economies at the same time. By contrast, the last time the United
States went into recession, in the early 1990s, Japan was still
enjoying strong growth, along with Germany and the emerging economies
of East Asia, helping to buoy the economies of other nations.

During this year's second quarter, the U.S. economy grew at a meager
0.2 percent annual rate, according to Commerce Department figures
reported last week. Fears that U.S. corporate profits will continue to
be disappointing because of generalized economic weakness led American
stock indexes lower yesterday. The Dow Jones industrial average fell
1.9 percent to close at 9840.84. The Nasdaq composite dropped 3
percent, to 1705.64, its worst close since April 4.

In Europe, meanwhile, recent government data show that in the second
quarter Germany's economy did not grow at all, and Italy's contracted
slightly. Concerns about lackluster economic performance in Western
Europe, where many forecasters anticipate growth of less than 2
percent this year, caused share prices to tumble yesterday. Germany's
main stock index fell 3.4 percent to a 29-month low; Britain' dropped
2.1 percent to its lowest level in 34 months; and France's slid 2
percent, hitting a 23-month low.

This morning's economic news from Tokyo demonstrates that Japan is the
weakest of the three major economic powerhouses. And many economists
believe Japan's economy will continue to contract this year. That is
because Japanese companies still must work off excess inventories and
are unlikely to consider investing in new plants and equipment until
well into next year.

The latest report compounds the challenges facing the reform-minded
government of Prime Minister Junichiro Koizumi. The Koizumi cabinet,
which has pledged to tackle the huge bad-loan problems plaguing
Japanese banks, has also promised to cap deficit spending, on the
grounds that government borrowing has gotten out of hand in recent
years. But analysts predicted that today's report will force the
government to accept the need for an economic stimulus package.
Koizumi said he would make a decision about a stimulus package after
seeing the economic numbers.

"I think we are effectively in a recession," said Tomoko Fujii, an
economist at Nikko Salomon Smith Barney. "There is no other way but to
mix structural reforms with some short-term stimulus measures" to keep
the economy from entering a free fall.

There are some signs of recovery elsewhere in the global economy,
especially in the United States, where the Federal Reserve has cut
interest rates seven times this year. Some leading indicators of U.S.
economic performance have been rising in recent months, and on
Tuesday, a survey of purchasing managers suggested that the battered
manufacturing sector turned up in August. In Germany, a closely
watched measure of the business climate recently rose.

But just as increasing economic interdependence among nations ensured
that the U.S. boom of the 1990s would help keep much of the rest of
the world out of recession, now those same linkages are working in a
negative way. Weakness in the U.S. market has translated into sluggish
demand for goods made overseas, and slumps in foreign markets have
resulted in cutbacks in U.S. exports.

"This is the first global downturn in a very long time," said Neal
Soss, chief economist at Credit Suisse First Boston. "Ten years ago
when the U.S. went into recession and then had a slow recovery, Europe
was in the midst of German reunification and the boom that that
brought. So this is a particularly dangerous circumstance, because
it's hard to identify where the engine of recovery will be."

On the brighter side, Soss added, U.S. consumer spending - the savior
of the global economy's performance in recent years - has held up
remarkably well this year, and he emphasized that the stock market
declines in the United States and Europe do not necessarily reflect
economic reality. But the plunge in share prices may well hurt
economic growth.

In an effort to defuse one controversy concerning Japan's economic
problems, Hakuo Yanagisawa, head of the Financial Services Agency,
declared yesterday during a visit to Washington that he is willing to
allow the International Monetary Fund to assess the state of the
nation's banking system - though he declined to say when.

Last week, Yanagisawa rebuffed the IMF's request to send a team to
conduct an in-depth review of Japanese banks under a program designed
to strengthen financial systems around the world. His assertion that
Japan's Financial Services Agency lacks the staff to handle such a
review was questioned by some analysts because Tokyo has a history of
withholding embarrassing data about its banks.

Yanagisawa said he assured IMF Managing Director Horst Kohler that he
views the IMF audit "in a positive light." But he balked at
establishing a timetable, saying his agency's staff shortage meant
that "even with a tiny bit of additional work, we will collapse," he
said.