Posted on: Friday, June 22, 2001

Debt measures will slow Japan's growth

Bloomberg News Service

Japan consumers must brace for an "economic adjustment period," Japan's economy minister warned. Advertiser library photo • March 29, 1997

Tokyo — Japan's economy will barely grow for the next few years as the government lowers spending and forces banks to write off bad loans, economy minister Heizo Takenaka said.

Economic growth will be close to zero this year and won't top 1 percent for two to three years after that, Takenaka said. That's an admission that Prime Minister Junichiro Koizumi's plan to end an 11-year spending binge will aggravate an economic slowdown that began earlier this year.

Government plans outlined in a report yesterday, including Koizumi's pledge to cap new bond sales at $244 billion next fiscal year and force banks to write off bad loans, will slow growth to halt and drive companies to bankruptcy. Still, policy-makers and investors say Japan can't afford to delay the changes any longer.

"If we were to go on the way we have, then this country would collapse," Finance Minister Masajuro Shiokawa said.

As it is, the world's second-biggest economy will probably grow just 0.2 percent in the fiscal year started April 1, according to the latest Bloomberg News survey. The economy expanded 0.9 percent last fiscal year.

Gross domestic product fell 0.2 percent in the three months ended March 31, leaving Japan on the brink of recession barely two years after the last one ended.

Koizumi, who was elected prime minister two months ago, is the first leader since Japan's decade-old economic slump began to rein in a spending spree that has pushed the nation's debt to 130 percent of GDP.

"The government is reiterating reforms are necessary for the long-term health of the economy, but that the cost associated with implementing them is likely to be a couple of years of low economic growth," said James Malcolm, senior economist at J.P. Morgan Asia (Securities) Ltd.

The yen weakened 0.8 percent to 124.25 per U.S. dollar after strengthening to 123.15 earlier today.

Takenaka said Japan must brace for an "economic adjustment period" over the next two to three years, when growth probably will average between zero and 1 percent.

Koizumi's top economic panel recommended in the report that the state-backed Resolution and Collection Corp. be allowed to buy bad loans that banks haven't written off in the next two to three years. Japan's lenders are carrying 150 trillion yen of bad and risky loans, according to some estimates.

Still, writing off bad loans probably will cost between 100,000 and 200,000 jobs, Takenaka said.