07/11/2001 - Updated 08:24 AM ET Japan economy 'deteriorating'; surplus shrinks

TOKYO (Reuters) — Japan's beleaguered economy was hit with more bad news Wednesday with a monthly report predicting that things are still bad, news that the trade surplus is still shrinking and gloomy remarks from the prime minister.

In the July report, the government left its economic assessment unchanged, breaking a trend of steady downgrades of its assessment each month for the past half-year, but it still painted a bleak picture for the world's second-largest economy.

"The economy is deteriorating," the report said. "Exports and industrial production continue to decline."

"There are no signs that the economy is bottoming out," said Haruhito Arai, a counselor for economic and fiscal policy at the Cabinet Office.

In a sign of the bad times for exporters amid a prolonged slump in overseas economies, the once-massive trade surplus shrank 65% to 252.1 billion yen ($2.01 billion) in May.

With a 449.5 billion yen deficit in the services balance, the trade balance for goods and services moved into deficit for the first time since January.

Prime Minister Junichiro Koizumi said after the figures were released that the economy is in a severe condition, highlighting the difficult task he faces in implementing structural reform measures that could worsen conditions in the short-term.

"The economy is not in a good shape. The condition is severe," Koizumi said in a panel discussion of seven Japanese political party leaders.

A string of bad economic data on top of a 0.2% contraction in gross domestic product for January-March have led most economists to believe Japan's economy is already in a recession.

But the reformist minded Koizumi has vowed to press ahead with reforms despite the short-term pain these changes are expected to inflict on the economy.

That determination has gained the support of the head of a powerful business lobby.

"It's no surprise that pain will accompany structural reforms in the short term," Takashi Imai, chairman of the Japan Federation of Economic Organizations (Keidanren), said in a speech.

"Unless we see an extremely steep slowdown, we think two to three years of low growth is something we must accept."

The slowdown has meanwhile put more pressure on the Bank of Japan to take further steps to help fuel growth.

Critics say that its free-money policy is not enough and Finance Minister Masajuro Shiokawa said that his ministry will tell the BOJ that more monetary easing is necessary to boost domestic demand.

"It is important to have a further credit easing to boost prices into a somewhat positive range," he told a news conference.

But he stressed that the government would not press the central bank to take the controversial step of targeting a specific level of inflation.

The government's July report downgraded the assessment of corporate profits, noting that companies had expected profits to decline 7.5% in the April-September period in the Bank of Japan's June "tankan" corporate sentiment survey.

"Corporate profits ... have flattened," the report said. In June, it said growth in corporate profits was slowing.

But the decline was within the government's expectations, and so did not warrant a downgrade for the overall economic assessment, said Arai of the Cabinet Office.

The report hinted that some aspects of the economy, such as job conditions, showed signs of bottoming out, although unemployment remained at a record high 4.9%.

But a further worsening is expected on the trade front.

Exports are likely to remain sluggish as economies around the world decelerate, while high oil prices and cheap imports from Asia and Europe will push imports higher, Ogata said.

"I think Japan will start posting a trade deficit in half a year or so," said Kazuhiko Ogata, senior economist at HSBC Securities.

Bank of Japan Governor Masaru Hayami was quoted by officials as telling a meeting of economic ministers that the Japanese economy will remain in an "adjustment phase" for a while.

He also said that foreign investors, an important source of cash for Japanese shares, will return to the market.

"If structural reforms progress, I expect foreign funds to return to the Japanese market," Hayami was quoted as saying.

Tokyo's benchmark Nikkei 225 share average tumbled more than 2% Wednesday to end just above the key 12,000-point threshold. It closed down 2.4%, or 295.30 points, at 12,005.11.

One of the few bright spots for the economy was a newspaper survey showing a rise in summer bonuses, which are often used for big-ticket purchases.

A survey by the Nihon Keizai Shimbun showed summer bonus payments per person rose 3.4% from a year earlier, providing some hope for a long-awaited recovery.

It was the first time since 1997 that bonus payments had increased by more than 3% year-on-year, it added.

http://www.usatoday.com/money/world/2001-07-11-japan.htm

-- Martin Thompson (mthom1927@aol.com), July 11, 2001

Answers

Let us hope that the Daiwa bank, biggest bank in the world, holds up, at least. Just a few weeks ago it was reported to be precariously close to default. If this happens it will send shock waves, not only through Japan, but around the world.

-- Billiver (billiver@aol.com), July 11, 2001.