Japan: Can Tokyo Soothe the Business Sector?

The closely watched Tankan survey of Japan's business sector has raised doubts about the health of the recovery. But how--or if--Tokyo will respond remains an open question.

The first-quarter index of confidence for large manufacturers fell to -5 from 10 at the end of 2000, the first drop in two years (chart). The Tankan survey reported similar declines for small businesses and large nonmanufacturers.

A big worry is the outlook for exports. Manufacturers expect foreign demand to be virtually flat this fiscal year, which began on Apr. 1. Exports rose 4.3% in the year before, but demand weakened considerably at the start of 2001 when export volume fell in January and February.

Companies would like to see a weaker yen, since a cheaper currency would make Japanese goods more competitive globally. But the yen is already hovering at a 2 1/2-year low against the U.S. dollar, and U.S. officials have implied that Washington would not support a weaker-yen policy.

The disappointing Tankan survey came a few days after some improving signs from Japan's consumer sector. The jobless rate fell from a record high of 4.9% in January to 4.7% in February. Employment rose by 280,000. And household spending among salaried workers rose by a larger-than-expected 3.1% in February over January, the third increase in a row. To be sure, the jobless rate could begin to rise again. But increased consumer buying might have enabled Japanese real gross domestic product to grow at an annual rate of just under 1% in the first quarter.

Right now, the government has few options to jump-start growth. The Bank of Japan has already cut interest rates to nearly zero. Tokyo could institute another round of public-work projects, but that would only increase Japan's already massive budget deficit. And such a move would do little to solve one of Japan's biggest crises, the mountain of underperforming loans being carried by banks. Until that problem is addressed, Japan will find it hard to mount a lasting recovery.

By James C. Cooper & Kathleen Madigan

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