Japan's economy falters

Junichiro Koizumi has promised a new approach

By the BBC's Charles Scanlon in Japan

Japan's government has admitted the world's second largest economy is still "deteriorating".

The Cabinet Office said in a monthly report submitted to a meeting of economic ministers on Wednesday that corporate profits showed no signs of growth.

Last week the Bank of Japan's quarterly Tankan business confidence survey found that companies expect a 7.5% year-on-year fall in profits during the six months to September.

It is now widely believed that Japan is in recession, with its exporters hit hard by the slowdown in the United States.

Government response

Much depends on the response of the government.

The new prime minister, Junichiro Koizumi has said the report "is not good".

"There is no growth without reform," Mr Koizumi added.

He has promised a new approach, saying he is prepared to risk even more pain in order to tackle the country's underlying problems.

Retail woes

Sogo department store chain collapsed with massive debts

The town of Kisarazu across the bay from Tokyo used to be a thriving port and industrial centre.

But it is fallen on hard times, hit hard by the economic slump.

The latest blow came last year when the Sogo department store chain collapsed with massive debts.

Cut price clothing merchants have moved in for the time being, but most of the floors have been abandoned.

Bad debts

This is what happens when Japanese banks write off bad loans and let companies fail - a recipe favoured by the current government in Tokyo.

"We've lost billions of yen in sales. The city centre has become a vacuum, people don't come here anymore.

"I can't see how the prime minister's economic reforms are going to help us," Akio Kinoshita, Manager,Toshi Kaihatsu Co.

In many of Japan's major cities, signs of hardship are not immediately apparent, but the economic malaise is clearly taking its toll here.

Kisarazu used to be the commercial hub of the entire region, but the closure of the main department stores knocked the heart out of the town.

Businesses are moving out and land prices are falling. It is a pattern that could be repeated across Japan.

Public spending

For 10 years, the government has kept the economy afloat with massive spending on public works.

An elaborate tunnel and bridge combination was supposed to revitalise the region around Kisarazu.

But it is getting little use - because of exorbitant tolls.

If anything it is drawing shoppers in the wrong direction - back towards Tokyo.

The prime minister, Mr Koizumi has won enormous popularity with his calls for economic reform.

He says he is prepared to risk more bankruptcies and higher unemployment for the sake of long-term gain, but clearly there are risks.

The government faces a delicate balancing act.

If it gets things wrong and plunges the economy deeper into recession, the misery in places like this could become much more widespread.