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Friday, 15 February, 2002, 14:59 GMT
Koizumi faces harsh economic reality
Junichiro Koizumi's face on a large TV screen
Japanese faith in Junichiro Koizumi is on the wane
Just two day's before welcoming US President George W Bush to Tokyo, Japanese Prime Minister Junichiro Koizumi briefed foreign reporters on the Japanese economy.

As he sat down, the prime minister could be heard muttering the words "victory at all costs", a favourite quotation from Britain's wartime leader Winston Churchill.

He was, he said, committed to reforming the Japanese economy and confident it would rise again.

Homeless man in Tokyo park
There are visible signs of poverty, even in Tokyo
But powerful vested interests, including many people in his own party, are putting up stiff resistance.

After months of stratospheric opinion poll ratings, Mr Koizumi's popularity is on the slide. A very public row with his maverick but well-liked Foreign Minister Mariko Tanaka in January, led to her losing her job and the public losing faith in the prime minister's resolve to push painful reforms through.

Stagnant economy

The backdrop to Mr Koizumi's battle is a decade of economic stagnation.

Figures to forget
Unemployment: 5.4% - a record
GDP: 2.2% down
National public debt: $40bn (130% of GDP)
Retail sales down 4.9%
Bad debt: $1 trillion
For too long Japan has been chasing the holy grail of a "self-sustaining recovery".

Tepid growth on the back of the tech boom in the United States prompted the government to declare that salvation was at hand.

But last year all illusions were shattered as global recession brought Japan face to face with some painful truths.

Japanese exporters had been one of the few pillars of strength in an economy weighed down by huge debts, low consumer demand and an uncompetitive domestic industries and services.

Intense pain

When exports hit a brick wall in the early part of 2001 with the rapid slowdown in the United States, Japan spiralled back into recession. The underlying weaknesses in the economy could no longer be covered up.

Job seeker
More and more people are out of work
But the pain has been even more intense than feared. Unemployment is at a record high of 5.4% and business confidence is at an all time low.

The economy is suffering a sharp contraction (-0.5% in the third quarter) and even the government admits there is little hope of growth in 2002.

First-time visitors to Japan often get a very different impression. This is still the world's second largest economy. Many Japanese have large savings, and the glitzy department stores in Tokyo and Osaka are packed with well-dressed people snapping up designer goods.

But in the small towns and industrial centres, there are boarded-up shops and job centres thronged with the newly unemployed. Long-delayed corporate restructuring is getting under way and the full impact of the downturn is now being felt.

Political pressure

The prime minister has been increasingly criticised for getting his priorities wrong. He has focused on privatising bloated and money-wasting public corporations - slow and painful work given the strength of resistance in the LDP and the bureaucracy.

Shops in Tokyo
Japan needs to increase consumer spending
Many economists want more urgent steps to stimulate demand. Pressure is growing on the government to bail out the banks, which are staggering under the weight of bad loans.

Some estimates put the value of non-performing loans as high as $1 trillion - and with record numbers of bankruptcies the figure is growing all the time.

Even Mr Koizumi's insistence on fiscal restraint is being challenged.

No-one questions that public finances will have to be brought under control. Debt currently accounts for more than 130% of GDP, the highest of any G7 country, and Japan's credit rating has been downgraded to the same level as Slovenia.

But economists say budget cuts and talk of tax hikes are dangerous medicine in the depths of a recession.

Export hopes

The biggest threat comes from a deflationary spiral that is pulling prices and incomes ever downwards. It also increase debt burdens and gives consumers little incentive to spend as prices continue to fall.

Businessmen reading a newspaper, sitting on a wall
Job security has plummeted
The Bank of Japan has reduced interest rates to zero and pumped money into the financial system, but Japan is caught in a liquidity trap. Confidence is so low that viable businesses no longer want to borrow money.

The BOJ has so far resisted pressure for radical steps to stimulate inflation. But it could be forced to act in a crisis.

The best hope is that the yen will continue to fall in value, and that the United States economy will start to recover in the middle of 2002. Japan hopes it will be able to export its way out of trouble once again. That would provide some temporary relief.

Prime Minister Koizumi wants an endorsement of his plan from President Bush but the Americans will need a lot of convincing that Japan has finally acquired the commitment to tackle its underlying malaise.

See also:

07 May 01 | Asia-Pacific
Koizumi outlines vision for reform
24 Apr 01 | Asia-Pacific
Profile: Junichiro Koizumi
24 Apr 01 | Asia-Pacific
Koizumi hails 'peaceful revolution'
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