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Japan's economy sinks deeper

Friday, March 8, 2002

TOKYO -- Japan's hobbled economy sank deeper into recession, shrinking 1.2 percent during the three months ending in December, the third consecutive quarter of contraction.

This nation has been fighting a slowdown for more than 10 years. Last quarter, which ended in September, Japan slid into its third recession in a decade -- sinking 0.5 percent or an annual rate of 2.1 percent. Recession is generally defined as two consecutive quarters of contraction.

The contraction for the latest quarter translates to an annual 4.5 percent contraction, the government said Friday.

It also marks the first time the Japanese economy has contracted for three consecutive quarters since 1993, according to Cabinet official Katsuki Oda.

Before that, it had never seen even two back-to-back quarters of contraction since the government began keeping such records in 1980.

A 12 percent drop in private sector investment dragged down overall growth. The plunge in investment outweighed a 1.9 percent increase in private consumption and a 2 percent rise in household consumption.

The government also said fallout from the Sept. 11 terrorist attacks also hurt the economy.

Domestic demand -- seen as a key factor in firing the economy -- dropped 1 percent, while exports -- the other important engine for growth -- shrank 0.1 percent.

The government report comes in the wake of some good news about the Japanese economy -- the stock market has been recovering, the unemployment rate fell in January for the first time in nearly a year and inventory adjustments at companies are moving ahead.

But Friday's data also underline how the trickling signs of Japan's economic recovery are unlikely to ring as true as those emerging recently for the U.S. economy, which grew at an annual rate of 1.4 percent for the quarter ended in December.

That's because Japan's problems are more basic or linked to the fundamental structure of the economy than the U.S. slump. They call out for deeper changes.

"The domestic economy is still not good because the problems are structural," said Yasuteru Yamamoto, economist at Sumitomo Life Research Institute in Tokyo. "It's hard to see the economy shifting any time soon to positive growth."

For decades of modernization, Japan had public works projects and booming exports to keep its economy going.

Both are running out of steam.

Top Japanese manufacturers, including electronics companies, are rapidly losing their competitive pricing edge against growing Asian rivals.

And the increasingly urbanized Japanese public is no longer interested in seeing pork-barrel spending funneled for yet more roads and bridges.

The problem is that Japan is still desperately trying to find new sources for growth based on fresh demand among its own people.

The U.S. economic recovery is likely to give a sorely needed boost to this nation.

Japan's automakers such as Toyota Motor Corp. and Honda Motor Co. are recording hefty profits on the back of U.S. sales.

Unaffected, however, are whole chunks of the Japanese economy more dependent on demand at home such as retail and other services -- the only area the economy is adding jobs at a time when work is dwindling in construction and manufacturing.

It remains to be seen if Japan can take advantage of the lift from the U.S. economic recovery to buy enough time to bring about reforms, such as easing government regulations and encouraging competition to keep abreast of globalization.

The Japanese government has said it does not expect economic growth for this fiscal year or even the following one that starts next month. It's not until the fiscal year ending in March 2004, the economy will eke out 0.6 percent growth, according to the government.

It also marks the first time the Japanese economy has contracted for three consecutive quarters since 1993, according to Cabinet official Katsuki Oda.

A 12 percent drop in private sector investment dragged down overall growth. The plunge in investment outweighed a 1.9 percent increase in consumer spending and a 2 percent rise in household consumption.


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