The Prime Minister, Tony Blair's trade mission to Japan is likely to focus on maintaining the friendship between the two countries.

But suffering under an economic depression caused by the slump in the "tiger economies", Japan is no longer the financial power it once was in the 1980s and early 1990s.

Mr Blair is present in Japan as both British Prime Minister and President of the EU. He plans to launch a festival of British arts and culture which will run in Tokyo throughout 1998.

The visit takes place amid pressure in Britain for a full apology and cash compensation over the Japanese treatment of British prisoners during the Second World War. However, this issue is not on Mr Blair's agenda for discussion with the Japanese government.

Inward investment

Additionally inward investment from Japan is looking slightly uncertain in Britain. In December, it suffered a blow when a £360m Toyota plant went to France instead, despite the fact that the country's wages, social costs and welfare benefits are much higher.

Some attributed Toyota's decision to the government's monetary union policy and Britain's failure to take part in its launch. European Monetary Union could boost the car industry on the continent and Britain's absence from it might be seen in the east as as a competitive disadvantage. Cars or parts built in Britain, outside the EMU will be vulnerable to changing exchange rates.

Despite this, Japanese car production in Britain is still three times higher than the rest of Europe. During his trip Mr Blair is expected to announce new investment from Japan in its Deeside plant in North Wales which will exceed £200m.

Financial crisis

Japan is in a deep financial crisis

As a result of economic crisis Japan's economy is at a virtual standstill. There is no end in sight to the crisis and some fear that its whole financial system is in danger of collapse.

Currently the Nikkei 225 stock index is languishing around Y15,000, having fallen from a 1997 high of just over Y20,681 on June 16 and far from the glory days of the Bubble Economy's record high of Y38,915 in December 1989.

The value of the yen has depreciated almost 15% against the dollar in the past 12 months.

A Japanese floor trader takes a break during the October crash

The collapse of Yamaichi Securities on 24 November with liabilities of over £16bn was the dramatic catalyst which finally focused world attention on the financial malaise at the centre of the Japanese economy. Since then the government has implemented several reform measures, but with little evident success so far.

The extent of the debt problem facing Japanese banks was illustrated on December 8 when the Ministry of Finance and Bank of Japan reported that some Y79trillion (£395bn) held in loans - 14% of all loans - may not be recoverable. This was more than three times the amount officially estimated in April of this year.

The road to recovery? On 16 December the government unveiled a plan to place some Y10trillion in government bonds at the disposal of the Deposit Insurance Corporation, a semi-official industry body which compensates depositors and investors when banks and brokerages fail.

It also unveiled surprise cuts in corporation tax from 37.5% to 34.5%. Small increases in tax-free allowances were also proposed, a partial relaxing of the tight fiscal policy the government seemed determined to uphold when they increased sales tax from 3% to 5% in April. These changes will not be introduced until the start of fiscal 98 in April.

Ian Harwood, Chief Economist at Dresdner Kleinwort Benson, has warned that despite the record low interest rates, the precarious financial situation of the country's banks is leading to a credit crunch which may hinder any recovery and spread the problem to the industrial sector with increased bankruptcies.

Opinions diverge over which course the Japanese economy will take from here. Pessimists maintain that exports boosted by the devalued yen will face opposition from a protectionist US, especially in a year when political sentiments will be sharpened by the prospects of mid-term elections.

A drop in the demand from East Asian markets, which account for roughly a third of Japanese exports, will also hit the economy hard.

More optimistic analysts maintain that the overriding view in the US will be supportive towards the engine of any possible Asian recovery.

The increased participation of foreign firms in the Japanese market has already begun to happen in a limited way with Goldman Sachs and Bankers Trust announcing their intentions to buy up some of the bad loans held by Japanese banks and Merrill Lynch's announcement of their intention to set up a retail brokerage employing former Yamaichi staff.
 

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