New forecast admits Japanese economy shrinking

By Yoshiko Matsushita
Bloomberg News Service

TOKYO — Japan said the economy will shrink 0.9 percent this fiscal year, its worst performance in more than 20 years. The new forecast may be used as ammunition by legislators who want to increase spending to stave off a prolonged recession.

It's the first time the government has officially acknowledged that the world's second-biggest economy is shrinking. While Prime Minister Junichiro Koizumi said when he was elected in April that Japan might face a two-year recession, the government until now had stuck with an initial forecast of 1.7 percent growth in the fiscal year to March.

The government will submit to the Diet, Japan's parliament, a plan to spend an extra $25 billion this fiscal year to create jobs and shore up the economy. Ko-

izumi may face increased pressure from within his Liberal Democratic Party to break his self-imposed limit on bond sales and spend more.

"The current policy stance is unsustainable and the government is gradually moving towards a more suitable response," said Richard Jerram, chief economist at ING Baring Securities (Japan) Ltd. "Within the LDP, there is already active discussion about a second spending package and this will be a more meaningful event than the one already announced."

The economy last shrank in the fiscal year ending March 1999, when gross domestic product fell 0.6 percent. A result in line with the new forecast would be the worst performance since 1980.

The government may still be too optimistic. The economy shrank 0.8 percent in the three months ended June 30, and can sink no more than an average 0.3 percent in each of the other three quarters in the fiscal year.

Bank of Japan policy-makers last week said the economy will shrink up to 1.2 percent in the fiscal year ending March, and decline as much as 1.1 percent next year. Economists surveyed by Bloomberg News last month forecast a 1.1 percent decline this fiscal year.

In its forecast, the government said every component of gross domestic product was suffering.

Capital spending, which accounts for about one-sixth of the economy, will fall 3.3 percent this fiscal year as companies scale back production in the face of the global slowdown, the government said. That would be the first drop in three years and is down from 3.8 percent growth initially estimated.

Consumer spending, which accounts for about 55 percent of the economy, is forecast to grow at a slower rate than first expected. The government expects consumers to spend an extra 0.5 percent, down from an initial estimate of a 1.5 percent gain

The government said industrial production will fall 9.5 percent, its first drop in three years, while the jobless rate will rise to an average 5.2 percent.