March 9, 2002 The Age (Melbourne) by Shane GreenTokyo -- The depth of Japan's recession was revealed yesterday, when new figures showed the economy shrank for the third quarter in a row, with gross domestic product declining by 1.2 per cent.
The extent of the decline in the December quarter surprised many economists, who had been expecting a figure of between 0.8 and 0.5 per cent, although analysts at HSBC Securities had forecast 1.4 per cent.
The slump was driven by a massive 12 per cent drop in business spending, with big Japanese companies slashing capital investment. Other figures out yesterday showed bank lending falling for the 50th month in a row. The only glimmer of hope from yesterday's figures and other indices released recently was a feeling that perhaps the worst may be over. Consumer spending, which accounts for 60per cent of GDP, increased by 1.9 per cent.
The further confirmation of Japan's deep economic problems came as the Japanese Government announced an investigation into possible currency manipulation of the yen, after a surge against the United States dollar in recent days.
After trading at 134 yen to the dollar last week, the yen fell as low as 126.36 this week. Finance Minister Masajuro Shiokawa said yesterday he was concerned about "artificial manipulation" of the yen.
A weak yen was seen by some as the key to Japan's economic revival, driving an export-led recovery.
Yesterday's GDP figures were further confirmation of the extent of the recession, and the massive problems confronting the Koizumi Government.
The world's second-largest economy, and Australia's biggest export destination, officially slipped into its third recession in a decade last December, after registering two consecutive quarters of decline in GDP.
The economy is in the grip of deflation, and unemploy-ment has reached a record 5.5per cent.
Government officials argued the decline could be explained by the economic impact of the terrorist attacks of September 11, and the discovery of mad cow disease in Japan, which has devastated rural producers and related retail activity, with beef sales slumping.
But HSBC Securities chief economist Peter Morgan said there were signs that the economy could be close to bottoming. "Given that capital spending fell so much, one has to start to feel that we've got a lot closer to the bottom," he said.
Mr Morgan said recent cyclical signs had been positive, with good progress in inventory adjustments, and signs that exports and production were turning around.
"We do seem to be seeing most of the hallmarks of some kind of cyclical turnaround," he said. "The issue is, how much does that get offset by the structural problems?"
One of the biggest structural problems is the banking sector, which is carrying bad loans of more than $A540billion. The close of books on March 31 for the end of the financial year will be the key challenge for the sector. The slide early this year on the Tokyo stock exchange saw the value of banks drop dramatically, and the banks have to account for their stockholdings at market value.
But a stockmarket rebound of 25 per cent in the past month, partly prompted by new government restrictions on short selling, has bolstered the value of the banks and the companies indebted to them. For the time being, the rally seems to have averted a financial crisis.
The assessment that the economy may be near the bottom was shared by Hiroshi Inagaki, senior economist at the Fuji Research Institute. While cautioning "it's not over yet", he predicted either this GDP figure or the next would be the worst.
But Mr Inagaki predicted that it would take several years for domestic demand to rebound. "What we need for economic growth is to educate workers again, to shift them from unprofitable industries to profitable ones, such as the software industry that requires workers have a high level of knowledge," he said. Structural reforms such as those cited by analysts hold the answer to ending Japan's decade of economic malaise.
The banks' bad loans remain a deadweight on the economy. Deflation has eroded the ability of companies to meet their debts, and the recession is producing more bad debts.
The government is under pressure to inject public funds into the banks to allow them to clear the bad debts, but there is a widespread view it must be accompanied by genuine reforms to the banks' lending practices.
In 1999, the Japanese Government injected more than $A10 billion into the banks to ease the bad-debt problem. Three years later, it is seen as $A10 billion wasted.