Asian economies moribund

Mr Koizumi still enjoys unprecedented popularity

Japan's government and central bank are preparing to issue gloomy economic forecasts reflecting the impact of the global slowdown and the US attacks.

There has been a big change in the underlying factors: the slowdown in overseas economies, the increasingly severe adjustment in the Japanese economy and the terror attacks in the US

Masaru Hayami
Bank of Japan

"I understand full-year growth will fall considerably below the 1.7% target," economics minister Heizo Takenaka told a parliamentary financial committee ahead of publishing the new forecast on Friday.

Bank of Japan Governor Masaru Hayami told the same committee the central bank's semi-annual economic report due on 30 October, would be much bleaker than the one in April.

Meanwhile in South Korea, the central bank has warned the economy would recover only in the second half of next year because of US-led war.

Japanese outlook

"There has been a big change in the underlying factors: the slowdown in overseas economies, the increasingly severe adjustment in the Japanese economy and the terror attacks in the US," Mr Hayami said.

Growth in Japan fell by a 0.8% from April to June from the previous quarter and is widely expected to fall for a second quarter, meeting a common definition of recession.

Mr Takenaka declined to give a new growth forecast.

The deteriorating economy has meant a shortfall in tax revenues, particularly corporate tax.

Policy back down?

It may force Prime Minister Junichiro Koizumi to abandon his election promise to reform the economy by limiting government borrowing to 30 trillion yen.

We're six months down the road, and nothing has changed except the outlook for the economy has got worse

Ron Bevacqua
Commerz Securities.

Finance Minister Masajuro Shiokawa said the government would stick to the target in the stimulus budget due on 9 November.

Monetary policy initiatives by the Bank of Japan have also been exhausted, the central bank governor Masaru Hayami told the same parliamentary committee.

"The BoJ has exhausted the room for further easing, monetary easing alone is not enough to overcome economic difficulties," he said.

Koizumi's luck

Six months after taking office with a bold economic reform agenda, Japanese Prime Minister Junichiro Koizumi still enjoys strong support.

Recent opinion polls show support for Mr Koizumi is still between 70% and 80%, making him possibly Japan's most popular prime minister ever.

Mr Koizumi promised to cut the massive public debt and clean up the bad debt-laden banking system but most of his time has been spent on non-economic matters.

"We're six months down the road, and nothing has changed except the outlook for the economy has got worse," said Ron Bevacqua, chief economist at Commerz Securities.

South Korean outlook

Central Bank of (South) Korea governor Chon Chol-hwan expects the economy to remain flat in the wake of the US attacks.

"Relatively resilient consumption might take a hit as well, increasing uncertainties about early economic recovery," he said in his speech.

A full-fledged recovery in exports and corporate investment was unlikely unless the US, Korea's key export market, rebounded, he said.

Exports fell for the seventh straight month in September to and consumer confidence index tumbled to 92.1 from 98.2 in August.

But a South Korean government think tank believes the economy may pick-up next year.

The Korea Development Institute (KDI) said it estimated gross domestic product, the broadest measure of a country's economic condition, would register 3.3% growth next year compared with a forecast 2.2% this year.