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The Honolulu Advertiser
Posted on: Thursday, June 20, 2002

Japan wary of false confidence

By Ann Saphir and Hitomi Aoyagi
Bloomberg News Service

TOKYO — Japan's policy-makers have seized on analysts' new forecasts that the world's second-largest economy will return to growth this year as the latest evidence the recession is over.

There's just one caveat.

A return to growth may be just another brief respite in Japan's 12-year economic decline, and may be taken by the government and companies as a cue to ease up on efforts to fix the ills at the heart of the slump, those analysts say.

"We remain far from optimistic on prospects for the economy," said Takehiro Sato, an economist at Morgan Stanley Japan Ltd., even after raising his growth forecast for the fiscal year to 0.5 percent from a previous estimated contraction of 0.2 percent.

"With the economy looking brighter, companies are slowing the pace of essential restructuring."

Sato is one of 14 economists in a Bloomberg News Service survey of 32 analysts who expect the economy to grow in the fiscal year that ends March 31, 2003. Three months ago, just three of 30 analysts surveyed expected growth.

The government's latest forecast is that the economy won't grow at all after retreating 1.3 percent last fiscal year.

"Some private forecasts are better than ours," Economic and Fiscal Policy Minister Heizo Takenaka said this week. That's more evidence, he said, that a recession that started 20 months ago has hit bottom.

The economy grew for the first time in a year last quarter, by 1.4 percent from the previous quarter, as exports had their biggest gain in 21 years.

Relying on overseas demand may help eke out a return to growth, but analysts said it won't fix the causes of Japan's decline. Among them are an 11-year slide in land prices and almost four years of falling consumer prices that have made it harder for companies to repay loans taken out during the peak of the asset-price bubble.

Banks have reduced lending for the past five years, starving the economy of fresh money.

"Money isn't getting invested in new and growing industries," said Takeshi Minami, an economist at UFJ Capital Market Securities. "The only thing that can end the pattern of short growth spurts in Japan is a rise in land prices, and so far I don't see that."

Minami sees the economy growing 0.5 percent this fiscal year, reversing his earlier forecast of a decline.

Japan has had several economic false starts in the past decade. The country rode a wave of exports to the United States during the technology boom to emerge from a 20-month recession in February 1999, only to plunge back into reverse 21 months later when the Internet bubble burst.

The government has tried to open protected industries to competition, force banks to write off nonperforming loans and wean the country from state spending during previous periods of growth.

Peter Morgan, HSBC's chief economist in Tokyo, warns that history may be repeated. "Japan remains crucially dependent on the continuation of global expansion," said Morgan, who expects the economy to shrink 0.1 percent this fiscal year, less than his previous forecast of a 0.5 percent decline.

Still, he sliced his growth forecast for next fiscal year in half to 0.5 percent, saying a stronger yen and cooling U.S. growth will slow export gains.

Even the most optimistic forecaster sees more trouble ahead.

"The failure to address domestic problems makes it difficult to be particularly optimistic," said Rich-ard Jerram, ING Baring's chief Japan economist, who says the economy will grow 2 percent in the fiscal year that starts April 1, 2003.