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Japan's economy shrinks

Koizumi has instructed his cabinet to prepare an extra budget to prop up the ailing economy  

By CNN's Marianne Bray

TOKYO, Japan -- Japan's June quarter GDP numbers are pointing to more difficult times ahead for the world's second largest economy.

Japan's economy shrank 0.8 percent in the second quarter, roughly in line with analysts' expectations.

Economics Minister Heizo Takenaka noted that the dip in growth was within government forecasts. But he said the country will have to revise its forecast for this year.

Experts say there is no hope Japan will hit its official target of 1.7 percent growth for 2001.

One more quarter to recession

At a glance: Japan

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Another down quarter will see Japan lumber into its fourth recession in the last 10 years. With no sure sign of a U.S. recovery, the world's powerhouses of the United States, Europe and Japan are struggling to lift out of the global meltdown.

Finance Minister Masajuro Shiokawa said after the data was released that Prime Minister Junichiro Koizumi had instructed his cabinet to prepare an extra budget to prop up the ailing economy.

That extra budget has been the subject of much debate in Japan in recent weeks, with the government resisting pressure to increase spending in the fiscal year.

Global credit ratings agency Moody's Investors Service added to the gloom on Thursday, saying it had put Japan's debt on review for possible downgrade.

The GDP figures and Wall Street's weak performance sent the Tokyo stock market down Friday, with the benchmark Nikkei index losing 2 percent by the midday break.

Better but hardly good

Japan stocks have been skidding over the last year
Japan stocks have been skidding over the last year  

The figures released by the Cabinet Office were slightly better than expected. But they were hardly good news for the Koizumi government, which is struggling to revive an economy that has been slumping for most of the past decade.

Economists had expected a 0.9 percent contraction.

"It's still a pretty big decline," said James Malcolm, senior economist with J.P. Morgan in Tokyo. "The risks to the near-term outlook are still very much on the downside."

The economy shrank 3.2 percent on an annual basis in the June quarter, underscoring the tough task ahead for Koizumi as he embarks on an ambitious program of reforms.

Japan escaped recession on a technicality, because its GDP was revised to a scant 0.1 percent rise in the March quarter, from a decline. The textbook definition of a recession is two down quarters for the economy in a row.

Still, that's an arbitrary measure.

"We're probably officially in recession now," Malcolm said. He expects another drop for Japan in the third quarter, predicting a 0.5 percent quarterly decline.

Experts had hoped Japan's economy was recovering last year. It grew 0.6 percent in the three months ending in December.

But it has taken a sharp turn for the worse this year, and experts see little hope of a rebound anytime soon.

The slump will spill over toward the end of the year, J.P. Morgan predicts, with a 0.1 percent drop in GDP for the fourth quarter.


The United States and other countries are increasingly worried about Japan's willingness to take enough action to turn around its troubled economy.

In the long run, Japan's business and industry needs an overhaul, experts say. But now may not be the time to tackle those painful reforms, given the severity of this slump.

Koizumi's problem is that he must balance extra spending on a new budget with the painful structural reforms he has vowed to implement. Japan's runaway public debt is already the highest among major industrialized nations.

His plans include cleaning up the massive bad debts at the nation's banks, privatizing parts of the public sector and cutting back government spending.

Deeply rooted

The nation's woes are deeply rooted.

Bureaucratic government controls and export-oriented mass production served as a momentum for Japan's growth for decades. But the system has been unable to keep up with global changes.

Its banks face an enormous overhang of bad debts, which most Japan watchers see as its biggest business problem.

Electronics companies have been revising their earnings forecasts downward, and some big-name companies are expected to post huge losses for the fiscal year that ends in March 2002.

A slew of companies including Fujitsu, Hitachi and Toshiba have made massive layoffs in recent weeks, pushing unemployment to a record 5 percent in July, the highest since the government began keeping such data in 1953.

Bright spot

One bright spot is private consumption, which rose 0.5 percent in the June quarter.

Private spending accounts for some 60 percent of GDP.

"The most surprising part was a positive consumer number, we were looking for a sharp contraction in all the private sectors," Ron Leven, currency strategist at Lehman Brothers told Reuters.

But with unemployment at record levels and confidence turning down, spending is unlikely to prop Japan up for long.

There are few other areas of support. Corporate capital spending, a beacon of hope for Japan's tentative recovery last year, fell 2.8 percent.

So there is little chance Japan can avoid the classic definition of a recession with its next set of numbers.

"Going forward there's a high possibility we will get another negative growth number in July-September, judging from the bad July trade figures and continuing slowdown in production," Tetsuro Sawano, senior economist at Tokyo Mitsubishi Securities, told Reuters.

Reuters contributed to this report.


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