Japan: Recent Signs Show Little Progress

The Japanese economy is still relying on exports to drive growth. But with the U.S. and euro zone settling into lackluster recoveries and with deflation dampening domestic demand, prospects for a turnaround look uncertain.

The latest Tankan survey showed overall business confidence inched up to -30 in the third quarter, from -32 for the second quarter. Export-oriented manufacturers showed the most improvement, but the outlook for the fourth quarter shows increased caution. Forecasts for capital spending were less negative for fiscal year 2002, ending next March. That could change, however, if the outlook for sales and profits deteriorates and as businesses continue to focus on eliminating debt.

More signs of future weakness are surfacing. Monthly industrial production grew an additional 1.6% in August, but manufacturers think September output rose by just 0.4% and that October production will grow a smaller 0.2%.

Exports in August were up 5.5% from a year ago. But viewed month to month, they have been slipping since June, mainly because of falling demand in the U.S. The downward trend will worsen if the U.S. economy weakens in the fourth quarter, as many expect.

Deflation shows no sign of disappearing. August consumer prices were down 0.9% from a year ago. With no pricing power, companies are cutting payrolls and wages. So far since April, 180,000 jobs have been eliminated, with 50,000 coming in August alone--and the Tankan shows more pink slips coming. Worse still, wages in August fell 0.7%, and businesses slashed summer bonuses by 30%. With a weak job market and wages falling nearly as fast as prices, consumers will be more apt to save than spend.

A balanced recovery will come only when deflation is conquered and banks get healthy. The latest Cabinet changes the Bank of Japan's move to buy equities from banks, and stricter lending standards by banks are only the first steps.

By James Mehring in New York

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