Japan: Forget about a Turnaround Now

Japan was already in recession before September. Now, a U.S. contraction means that there will be no quick recovery for the world's second-largest economy.

That was the reading from the latest Tankan survey released by the Bank of Japan. The sentiment index of large manufacturers fell to -33 in the third quarter, from -16 in the second and 10 at the end of 2000 (chart). The 43-point slide was the steepest three-quarter drop since 1992. The results for nonmanufacturers as well as small businesses were equally distressing. Companies are downbeat about profits, capital spending, and employment prospects. (The BOJ said that 70% of the replies were received after the September 11 attack.)

Japan slipped back into recession in the spring. Real gross domestic product fell 0.8% in the second quarter. The monthly data indicate that real GDP fell by at least that amount in the third quarter. Housing starts have been weak. Industrial output fell 2.8% in July and rebounded by only 0.8% in August. Factory orders and sales are trending lower, and real household spending fell 1.3% in August.

The consumer sector has been hit hard because labor markets continue to collapse. Jobs rose by 50,000 in August, but the bulk of the positions were part-time. The unemployment rate stayed at a record 5% in August.

Policymakers had hoped that a pickup in U.S. economic growth would increase the demand for Japanese goods. That hope has all but evaporated now that the U.S. is sliding into recession.

Prime Minister Junichiro Koizumi has begun the difficult process of bank reform, a prerequisite for the economy's long-term health. But for the short run, the U.S. downturn means that Tokyo will face an even tougher time turning around the Japanese economy. The BOJ has cut interest rates to near zero, and Koizumi has already pledged to cut public-works programs by 10% in order to keep Japan's public debt below 120% of its GDP. With little policy stimulus coming, Japan's recession could drag on well into 2002.

By James C. Cooper & Kathleen Madigan

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