Outlook harsh for Japanese economy

Associated Press

TOKYO — Japan's economy will shrink until 2003 and the downturn could deepen if Tokyo fails to show progress in reining in public debt and reducing bad debt at the nation's banks, the Organization for Economic Cooperation and Development said yesterday.

In its report on Japan, the Paris-based organization said Japan's gross domestic product will shrink 0.7 percent this year and 1.0 percent in 2002. Gross domestic product, or GDP, is the value of goods and services that a nation produces.

The OECD warned that as the economy dips into recession, there will be a worse deflation — with prices continuing to fall, in turn bringing down profits, income, spending and other economic activity.

The report echoes the signs of economic deterioration apparent in a wide range of recent data. Corporate production and profits have plunged, consumer spending is weakening and the unemployment rate is at a record high.

The International Monetary Fund is projecting that Japan's GDP will contract 0.9 percent this year and 1.3 percent in 2002.

Japan acted too slowly in fighting a slowdown that hit more than 10 years ago. Its banks are saddled with bad debts, and companies that depend on exports for profits are badly hurt by the slowdown in the United States that has only worsened after the Sept. 11 terrorist attacks.

The OECD called on the Bank of Japan to loosen credit further by increasing the volume and variety of financial assets it buys.

Japan's central bank has already lowered interest rates to zero and, unlike its counterparts in the United States or Europe, cannot slash interest rates.

The OECD said Japan's economy will be likely to start recovering gradually by 2003. A rebound in the global economy in mid-2002 will boost exports, resulting in modest economic growth of 0.8 percent in 2003, it said.

The Japanese government recently acknowledged that the economy will not grow 1.7 percent during the fiscal year ending in March, the government's target. It will instead shrink 0.9 percent, officials said.

The OECD report put pressure on Prime Minister Junichiro Koizumi to move ahead with his proposed reforms such as fixing the bad-debt crisis at the banks.

"The government's reform program could improve prospects for the economy, but risks are mainly on the downside due to financial market fragility," the organization's report said.