Japanese consumers suffer as yen falls

The announcement has caused world money markets to fall and the yen to weaken further.

But Prime Minister Ryutaro Hashimoto's government has defeated an opposition motion condemning his mismanagement of the economy by 273 votes to 207 in Japan's lower house.

Gerald Lyons, DKB on Japan

Japan's economic weakness is at the heart of the problem. The new figures show that Japan's economy shrank during the financial year ending March 31, 1998 by 0.7% - for the first time since 1974.

The accelerating rate of decline surprised analysts who were expecting a less severe fall.

Exports to Asia have been hit

Japan's problems have two causes. First, the Asian crisis has hit Japanese exports hard - because Japan exports more than one-third of its products to Asia.

There are also serious domestic weaknesses in the economy. The collapse of land and property prices has left Japanese banks burdened with an estimated ¥ 76 trillion yen ($530bn) in bad debts.

In the first quarter of 1998, Japan's economy contracted at an annual rate of 5.3%, after a drop of 1.3% per annum in the last quarter of 1997. Two quarters of falling growth are generally considered a recession.

And consumer confidence has fallen as layoffs and unemployment have swept through the once-secure labour market. A new survey showed that corporate bankruptcies in May were up by 37% to a new post-war record.

Yen on the slide

Japan's economic weakness is badly affecting its currencies, the yen, which has fallen this week to an 8-year against the dollar.

This makes Japan's exports cheaper, but hurts other Asian countries who are trying to compete with Japan in Western markets. It also makes imported goods more expensive - and harder to sell - in Japan.

The yen touched ¥144.73 to the dollar in overnight trading, and finished in Tokyo on Friday just above ¥144. Some dealers fear the yen could quickly fall to 150 or 160 to the dollar.

Bond markets were boosted by the flight to quality as investors looked for a safe haven for their money.

The key Tokyo stock market index, the Nikkei 225, fell below the 15,000 level on Friday after Wall Street and London had major falls before ending up 8 points at 15,022.

Japanese Prime Minister Ryuturo Hashimoto said that the sell-off could have serious consequences for his recovery plan. "I think this number is quite severe in light of the economic stimulus package and the plan for bad loans we have hammered out, he said.

He appealed to the the Japanese parliament for speedy passage of his ¥16,000 trillion public spending stimulus package.

World stock markets have been hit by Japan's problems

Asian markets from Korea through Singapore are trembling. Dealers worry that exports to Asian countries - and company profits - would suffer from a weak yen and a prolonged recession in Japan.

The yen's slide was accelerated when US Treasury Secretary Robert Rubin told Congress on Thursday that any intervention would only be "temporary" and that the "weakness of the yen reflects economic conditions in Japan and can only be remedied by restoring economic strength in Japan."