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Tuesday, February 11, 2003

Japan Back in Reverse Gear

More bad, bad news from Japan.The economy has begun, once again, to contract. You could call it the incredible shrinking economy, were it not for the fact that humour seems to be out of place here, and that these results may give us a pointer to what's in store for the rest of us if I'm even halfway right about the root cause. Apart from the downturn, also worthy of note is the continuing decline in bank lending and the slow rate of growth in monetary supply.

Figures to be released on Friday are likely to show that the Japanese economy contracted in the December quarter, bringing to an end the shortest recovery in Japan's post-war history, a senior economic adviser to the prime minister conceded on Monday. "I am afraid that the economy is already contracting," said Haruo Shimada, professor of economics at Keio University and senior economic adviser to Junichiro Koizumi, prime minister. He said there was no sign of improvement in domestic consumption, with the only increase in demand coming from the external sector. The concession that the economy has stuttered to a halt came as figures showed last year's mini-export boom beginning to slow. Data for bank lending, also released on Monday, showed the 61st straight month of decline as financial institutions continued to shrink their lending base in an effort to shore up capital adequacy and prevent more loans from turning sour. Bank lending for January fell 4.7 per cent.

"Japan is never going to be driven too much by exports because they account for only 10 per cent of the economy," said Peter Tasker, head of Arcus Investment, a Tokyo-based hedge fund. "There's only so much you can do if the other 90 per cent of the economy is going in reverse." The current account surplus for 2002 rose 34 per cent from the previous year to Y14,248bn ($120bn, €112bn, £74bn), about 3 per cent of gross domestic product. Exports for the year rose 6 per cent thanks largely to a 13.7 per cent increase in shipments to Asia, of which almost a third were electronics goods. "Exports to Asia climbed very steeply in the first half of 2002 and have now levelled out," said Chris Walker, economist at Credit Suisse First Boston in Tokyo. Exports to the US rose just 1 per cent during the year.

Signs that the export-led recovery may be petering out came with figures for December, which showed the current account surplus shrinking 1.4 per cent year-on-year. Economists said an improvement in Japan's external performance tended to strengthen the yen, which then choked off further growth. "You had quite a sharp recovery in industrial production driven entirely by the export sector, but momentum peaked in summer and has been easing off since then," said Mr Tasker. He said there had been no collapse in economic activity since growth had never properly got going in the first place. "It's hard to collapse when you're already sprawling on the ground." The Bank of Japan also said on Monday that monetary supply in January grew at 2 per cent year-on-year, its slowest rate of increase since the end of 2000. The central bank's policy board meets on Thursday, but is unlikely to contemplate a radical change of policy before March, when a new governor is due to be appointed.
Source: Financial Times

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