March 14, 1999
Web posted at: 12:37 a.m. EST (0537 GMT)

In this story: Efforts could help stock market Cutting costs -- and workers Fewer corporate bankruptcies Specter of deflation RELATED STORIES, SITES

TOKYO (CNN) -- Japan has taken major steps to help its turbulent economy, and analysts say those measures could bring good news to other Asian countries, including China, Hong Kong and Singapore.

There is a lot at stake.

"Even though Japan's deflation is still fairly mild, it's probably the worst case in a major industrial economy since the 1930s" and the Great Depression, said Russell Jones, chief economist for Lehman Brothers in Tokyo.

"If the country's economy doesn't start to grow, the vicious deflationary spiral could really start to accelerate," he said.

A revival of the Japanese economy, the world's second largest, would be the best news to emerge in the Asian financial crisis since it began to bottom out last year in two of its first victims: South Korea and Thailand.

Japan's previous comeback attempts have not always worked well. But now, banks and corporations appear to be reviving the moribund economy, although signs of recovery could still sputter out as they have before.

Corporate restructuring, new, low-interest loans, government bond investments, and banks' write-off of many bad loans seem to be helping the recovery.

Since the economy went flat about seven years ago, Japan has spent billions of dollars building roads and bridges. Last year, it let the national currency, the yen, weaken against the dollar to help export giants such as Toyota and the steel industry boost profits in the United States.

This year it tried to kick start consumer spending by handing out free shopping vouchers -- billions of dollars' worth -- but that didn't generate much enthusiasm.

Then, the central bank, eager to expand the supply of money available for loans, cut a key short-term interest rate to nearly zero as a way to push investors into longer-term government bonds.

The Bank of Japan also may have started to buy government bonds as a way of creating new money -- the equivalent of printing yen -- to spread liquidity through the economy.

If these efforts prove successful, a flood of money could come into the stock market and corporate coffers, and the economy and financial system could begin to pull out of the crisis.

But not everyone is optimistic about Japan's long-term prospects.

"There are some signs that things are stabilizing for now," said Robert Allen Feldman, chief economist at Morgan Stanley (Japan) Ltd. "The Bank of Japan is taking steps that are overcoming some of the headwinds against the economy.

"However, the headwinds are going to keep blowing. And if the bank can't keep up these fiscal and monetary policies because of problems such as the huge budget deficit, there could be more troubles by the end of the year," Feldman said in an interview.

Corporations also are restructuring in ways that will make them more efficient.

In a country where layoffs are still rare, Sony Corp. plans to cut its work force by 17,000 and slash the number of factories worldwide. It joined a growing number of companies announcing overhauls to cut costs and modify strategies.

Other long-overdue changes also are taking place.

Many banks are writing off their crippling bad loans for the first time since the stock market bubble burst in 1989 and real estate prices collapsed.

Top banks are opening their financial books to qualify for government assistance, which will allow them to begin lending again, not only in Japan but also in other hard-hit Asian countries.

In addition, the banking system has opened up to international companies, bringing in new investment.

The result has been signs of economic recovery.

There has been a sharp fall in the number of corporate bankruptcies. Retail sales have risen in recent months. Small companies, which depend on the local economy, have seen their stocks on the over-the-counter market rise about 50 percent from the lows of October.

Even the Nikkei Stock Average, which follows the profits of large companies, recently reached its highest level in seven months.

Despite the optimistic signs, the economy remains mired in its worst recession since World War II. The increase in public-works spending has led to a budget deficit projected to be among the highest in the industrialized world. And it's unclear whether banks will be able to unload their bad debts.

If an economic revival doesn't occur soon, another problem is not far off -- deflation.

Deflation is the persistent fall of most prices in goods and services, everything from big-ticket items such as homes and automobiles to daily necessities such as food and fuel.

It is caused when too much supply is chasing too little demand, and that has been one result of the 19-month Asian crisis -- it has left many industries with products that few people could afford.

If prices sink too low and companies can't cover costs or service their debts, they fire workers, cancel investments or go out of business.

At its worst, deflation can lead to a depression.

So far, Japan, Hong Kong, China and Singapore are only suffering mild bouts of deflation.

In fiscal 1998, producer prices fell 4.4 percent in Japan. This year, consumer prices are expected to slip 0.6 percent.

"Japan probably is the biggest victim of deflation in Asia," said Peter Morgan, senior economist at HSBC Securities Japan Ltd.

Consumer prices in Hong Kong were off 1.1 percent in January, compared with a year earlier.

In Singapore, the consumer price index fell 0.3 percent in 1998, and some economists expect it to drop even further this year.

In China, where many state-owned enterprises are overstocked, retail prices have steadily dropped in the last 14 months. Declines have been posted in everything from food to telephone service and housing.

The Associated Press contributed to this report.

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