Japan struggles to revive lifeless economy

The Japanese government has admitted the economy is at a "standstill" amid a slump in financial markets.

The stark assessment by the Economic Planning Agency (EPA) reverses earlier optimism over the nation's business conditions.

The EPA's November report, which is taken as the official government verdict on the economy, said "The economy has been in a state of standstill."

"The assessment was based on the fact that weak signs are seen in capital investment and industrial output, which had sustained the bottom of the economy," an agency offical said.

It was the first time the agency had given such a negative assessment since December 1995, when the yen's sharp appreciation hit manufacturers and exporters.

It came as the Tokyo stock market's key Nikkei index tumbled below the psychologically-crucial 15,000 level for the first time since July 1995.

Shares lost more than 344 points, or 2% of their value, on renewed fears over Japan's financial system.

The economic slowdown together with the swelling trade surplus was expected to renew US concerns about Japan's inability to achieve domestic demand-led recovery ahead of an Asia-Pacific summit in Vancouver later this month.

Analysts said the economy was being strangled by Japanese government policies of raising taxes to repair a huge budget deficit in the face of slack demand, rising stockpiles and slower export growth.

"The recovery is over," said Schroders Japan economist Andrew Shipley.

"We are in a cyclical downturn and the question is whether we can avoid a deflationary spiral, which is the nightmare of the central bank."

He forecast the Japanese economy would be either flat in the next fiscal year or would contract by 0.5%.

The economic problems are being exacerbated by serious trouble in Japan's over-regulated financial sector, analysts said.

The country's major brokerage houses were suffering from falling business due to widespread disaffection with stocks and from a loss of confidence due to a series of scandals involving pay-offs for gangsters preying on corporations.

Standar & Poor, one of the world's major agencies for assessing lending risks, raised "growing concerns about the instability of the Japanese financial markets.

To add to the country's woes, banks are said to be in critical condition because their capital levels rely heavily on holdings of shares, which have dropped sharply.

Shinichiro Takaya, a strategist at Yamaichi Research Institute, said the economy was not yet at the stage of recession.

"But the government has to do something to boost sagging demand immediately," he warned.

"If the weakness of domestic demand continues, that would damage Japanese exports, which have been good so far.

"The prospects for the Japanese economy are not good at all."