Japan Update
> By Sandra Sugawara
> Washington Post Foreign Service
> Saturday, March 14, 1998; Page D01
>
> TOKYO, March 13-Japan's economy shrank in the quarter that ended on Dec.
> 31, the government announced today, heightening fears of a deflationary
> spiral of lower wages, prices and profits that will make Japan powerless
> to pull East Asia at large out of its economic crisis.
>
> U.S. officials have been watching the deepening economic turn-down with
> grave concern. We're "deeply worried that Japan's deflationary problems
> are gaining dangerous momentum" and will send the economy "spiraling
> rapidly downward," a U.S. official said.
>
> The United States is urging the Japanese government to stimulate its
> economy through large tax cuts, deregulation and some public spending. A
> $78 billion plan of spending and tax cuts that the government is
> proposing is dismissed as insufficient by analysts.
>
> Japan's quickening economic woes come as bankruptcies and unemployment
> are rising in other Asian countries, such as Indonesia, South Korea and
> Thailand. These countries are racing against the threat of social unrest
> and severe recession. But their hopes of recovering through a wave of
> exports -- largely to the United States, Europe and Japan -- have been
> dampened by the dark times here.
>
> If Japan's economy sharply worsens, it could send the yen -- trading
> today in the mid-128 to the dollar level -- to much weaker levels. Some
> analysts are already predicting its value could erode in a few months to
> point that it takes 140 to buy a single dollar.
>
> Economists and U.S. officials worry that a much weaker yen would put
> additional competitive pressure on China to devalue its currency, the
> renminbi, to remain competitive in world export markets. That, in turn,
> could bring on another found of sell-offs of Southeast Asian currencies
> as those countries strive to remain competitive.
>
> It was drastic drops in Southeast Asian currencies last summer that
> sparked Asia's economic meltdown.
>
> In recent days, officials have released statistics indicating that the
> news could get much worse. Economists worry that Japan is about to get
> caught up in a vicious cycle in which lower demand for products causes
> prices to fall, which causes profits to be squeezed, hurting wages and
> jobs, which in turn causes even lower demand.
>
> "There are two kinds of deflation -- benign and malign," said Russell
> Jones, a Tokyo-based economist with Lehman Brothers Inc. "The benign
> kind is where falling prices are the result of some kind of productivity
> improvement, such as new computer technology. You are probably getting
> that in the U.S. But the malign one is where prices are down due to a
> lack of demand in the economy. And that's very much what Japan has right
> now."
>
> Today, the government announced that real gross domestic product shrank
> by 0.2 percent from the previous quarter. That number raised the
> possibility of the first shrinkage for an entire fiscal year, which ends
> March 31, since 1974.
>
> Wholesale prices, meanwhile, fell 1.0 percent in February, compared with
> a year earlier. Many things in Japan were selling cheaper at the
> wholesale level: Prices for electrical machinery dropped 2.5 percent and
> for lumber and wood products dropped 8.2 percent
>
> Profits fell 9 percent in the last three months of 1997, compared with
> the same period the previous year, the first such drop since 1994.
> Evidence of this trend is widespread in financial newspapers here:
> Hitachi Ltd. now expects profits to drop by 77 percent in the year
> ending March 31, while Toshiba Corp. expects profits to plunge by 85
> percent. Electronic game maker Sega Enterprises Ltd. said it would fall
> into the red for the first time since it was publicly listed 10 years
> ago.
>
> Per capita cash income fell 1.1 percent in January compared with a year
> earlier. For example, Mitsubishi Electronics directors have taken 10
> percent to 20 percent pay cuts, while managers had their bonuses slashed
> by a few thousand dollars.
>
> SRIC, a think tank associated with Sanwa Bank, said an inflation index
> it has developed combining 14 economic indicators predicts that consumer
> prices will begin to drop around the fall. "Judging from the falling
> prices, we are about to enter a deflationary phase," said Yuji
> Shimanaka, chief economist at SRIC. "It could be one of the worst
> deflationary phases in the postwar period."
>
> Yasuhiko Ushikubo, a senior economist at the Industrial Bank of Japan
> said the risk of a dangerous deflationary spiral were far greater now
> than during the recession of 1995, because unlike three years ago,
> corporate profits are no longer growing.
>
> While government officials say they expect a February tax cut, some
> deregulatory changes announced last month, and a banking bailout effort
> to help spur the economy, they do acknowledge growing problems.
>
> "Business sentiment at companies is worsening and personal consumption
> remains stagnant," Vice Finance Minister Koji Tanami said at a news
> conference this week. "I think the economy is now at a standstill and
> the situation is getting more severe."
>
> Many American analysts are advocating massive deregulation and
> restructuring, but the Asahi Shimbun, a daily newspaper, said today the
> government is heading in the other direction. To force the Nikkei stock
> index above 18,000 on March 31, when the fiscal year ends, the
> government plans to inject more than $10 billion into the stock market,
> according to the news report.
>
> The effort is an attempt to improve the financial reports of ailing
> companies that own a lot of stock. The Nikkei index surged today, with
> analysts saying that investors were jumping on for the ride up and would
> probably dump issues after April 1.
>
> Unfolding bribery scandals at the Finance Ministry and the Bank of Japan
> have also made consumers and investors jittery. Many analysts expect
> Bank of Japan Governor Yasuo Matsushita to resign soon, in the wake of
> the arrest of a top central bank official accused of leaking market
> operation information.
>
> Japan's economic woes and bribery scandals have emboldened opponents of
> Prime Minister Ryutaro Hashimoto. According to Japanese news media, some
> critics within his own party are asking him to "take responsibility,"
> which in Japan usually means to resign.
>
> Special correspondent Akiko Kashiwagi contributed to this report.
>
> c Copyright 1998 The Washington Post Company
>
> |
