Japan: Widespread Weakness Spells More Job Cuts

Japan's watered-down effort at bank reform has dominated the news in recent weeks, but the economy also has another problem: It's close to stalling out, reflecting falling exports and weakness in domestic demand that shows few signs of improving anytime soon.

Besides the 3.6% third quarter drop in exports, the lack of business investment keeps weighing on factory output. Early September data show industrial production slipped 0.3% from August. That put third quarter output up 2.1%, slower than the 3.8% pace in the second quarter (chart). Output estimates and sentiment among small and medium manufacturers point to an even slower fourth quarter.

Also, a depressed real estate market and government belt-tightening are hurting construction, with political pressure rising for a supplemental budget.

The widespread weakness means more job cuts ahead. September payrolls fell by 30,000, with construction losing 120,000 jobs. The service sector remains the only source of job growth. And the more success that top bank regulator Heizo Takenaka has in taking meaningful action on bank reform, the more joblessness will rise. Still, even if reforms grind to a halt, the likelihood of unemployment topping its record level of 5.5% is growing.

That's bad news for consumers, who have shown some signs of life. Spending has improved gradually since the spring, despite declines in real income, which was down 1.2% from a year ago in September. But, the Bank of Japan doesn't see deflation ending in 2003, and given unemployment fears, consumers could once again put off major purchases knowing prices will be cheaper later on.

Growth this quarter could be zero. But the BOJ says the economy should pick up again next spring, with real gross domestic product growing 0.4% to 1% for the fiscal year starting next April. Exports are expected to lead the way, lifting domestic demand. However, structural problems and a slow-moving government leave doubts about a turnaround.

By James Mehring in New York

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