Echoes Of Lost Decade Haunt Japan Again

Source : The Business Times, August 20, 2008

Fears of prolonged stagnation back in the frame as BOJ warns of sluggish growth, high prices

IN an attempt to shore up crumbling confidence, Bank of Japan (BOJ) governor Masaaki Shirakawa claimed yesterday that the world's second largest economy is not in immediate danger of recession or stagflation. But the Tokyo stock market was not reassured and the Nikkei 225 average plummeted 349.02 points or 2.7 per cent to 12,816.02 after the BOJ downgraded its official view of short-term prospects for the economy.

Plunging stocks in Asia generally reflected growing fears that the fallout from the US sub-prime mortgage crisis is not yet over and that a global recession is possible with the US, Europe and Japan already slowing and other Asian economies under threat.

The BOJ meanwhile warned of instability in global financial markets and threats to overseas economies, particularly the US. Rising commodity prices could hurt consumer demand, it said.

Japan's economy is being watched closely in the rest of Asia because of its strong trade and investment links with the region and fears that Japan could be sliding back into a prolonged stagnation of the kind that dogged the economy throughout the 'lost decade' of the 1990s. Fears were heightened by news last week that Japanese banks are facing new problems with bad loans, especially to the property sector.

Prime Minister Yasuo Fukuda's government has been sufficiently rattled by the speed and scope of Japan's economic downturn to have ordered ministers to come up with a package of stimulus measures, despite Japan's already precarious fiscal position. The emergency measures are expected to be unveiled some time this week.

'The possibility of a serious downturn (in Japan) in the near future is likely small,' Mr Shirakawa claimed after the BOJ's Policy Board decided to keep the central bank's short- term lending rate at 0.5 per cent. At the same time, however, the BOJ downgraded its institutional view of the economy, saying that growth is 'sluggish against a backdrop of high energy and materials prices and weaker growth in exports'.

The BOJ also predicted that inflation in Japan, which has soared to its highest level in more than a decade, will accelerate in coming months as a result of high energy and food prices. Despite the inflation threat, analysts predicted yesterday that the BOJ will be unable to raise interest rates until well into next year because of the sharp economic slowdown in Japan .

'Although (Japan's) economy is under no pressure to adjust production capacity and labour, these downside risks to the economy demand attention,' the BOJ said in a statement after the latest two-day meeting of its Policy Board.

Despite the measured language of the BOJ's remarks, and those of the governor, fears of imminent recession in Japan have been growing since last week when the government reported that the nation's economy contracted at its fastest pace in seven years during the second quarter of this year, with gross domestic product (GDP) registering a 2.4 per cent annualised decline.

The Japanese Cabinet Office also offered a bleak assessment in its report for August in which it acknowledged that 'the economy is recently weakening', while warning of weak exports, disappointing corporate profits and capital investment, along with soft private consumption.

The main drivers of growth during Japan's economic recovery from 2002 until the second quarter of this year were exports (especially to China, as well as to the US) and high levels of corporate capital investment based mainly upon external demand. Until recently, these were able to keep the economy growing even while consumer demand was softening, analysts noted.

But exports fell in June for the first time in nearly five years while imports rose sharply, resulting in a near-90 per cent drop in Japan's trade surplus to 139 billion yen (S$1.78 billion) compared with June 2007. While the rise in import costs was inevitable (given surging commodity prices), the fall in exports was unexpected and showed that the global economic slowdown is impacting not only demand from North America and Europe but also that from some Asian destinations that Japan exports to.

Corporate sentiment and capital expenditure plans in Japan have declined, in line with export prospects. The Bank of Japan's quarterly 'tankan' survey of business prospects for June showed sentiment to be at its lowest level in five years across a wide spectrum of businesses, and subsequent surveys have shown conditions to be worsening.

Adding to the gloom, data published this week showed that non-financial companies listed on the Tokyo Stock Exchange's first sector suffered a near 15 per cent drop in consolidated pre-tax profit during the second quarter of this year. This was the second consecutive quarterly decline and reflects the cost squeeze on the corporate sector, analysts said.