Japan: Ready to Ride through Another Recession?

The latest news on Japan's economy made it clear that the new government of Prime Minister Junichiro Koizumi must grapple with an economy that's likely sliding once more into recession.

Real gross domestic product slipped by 0.2% in the first quarter from the fourth. Housing, exports, and business investment all declined, while consumer spending was flat. The second-quarter economy likely fell at a faster pace, suggesting that Japan has fallen into a recession barely two years after recovering from the last one.

The dismal outlook for the world's second-largest economy was underscored on June 14 when a government report said business conditions were "deteriorating." The Bank of Japan seconded that view on June 18 when its own report said: "Adjustments in economic activity are gradually intensifying as production is declining substantially, reflecting a fall in exports."

The monthly data certainly confirm that the economy is faltering once more. The jobless rate in April stood at 4.8%, down only a bit from a high of 4.9% in January. Industrial production fell 2% in April from March; that output stands 4.1% below its level of a year ago (chart). But at the same time, inventories jumped 2.2%, suggesting output will fall further in coming months until businesses clear out the overhang of merchandise and supplies.

As far back as March, the BOJ made it clear that fiscal reforms, not monetary policy, must take the lead in correcting Japan's problems. And Koizumi has pledged to take steps to foster better growth, in part by reining in large budget deficits. But private economists agree that overhauling the banking system should be the primary focus.

Koizumi has warned that Japan may have to weather another recession--one that could last as long as two years--in order to launch a lasting rebound. If so, that would be Japan's fourth downturn in less than a decade, the worst performance for a developed economy in the post-World War II era.

By James C. Cooper & Kathleen Madigan

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