Japanese economy fears grow

Japan's industry is suffering from the US slowdown

Concern over the health of Japanese economy is set to be high on the agenda at the meeting of G7 finance ministers and central bankers in Sicily.

The ministers are expected to express grave concerns that the Japanese economy is slipping back into deflation, or negative growth.

But the Japanese officials are still presenting conflicting views of the state of the economy and are caught up in internal disputes over Japanese monetary policy.

Global expansion?

Japan's finance minister Kiichi Miyazawa admitted that concern over deflation in Japan will be a key topic for discussion at the meeting.

And newly-appointed US treasury secretary Paul O'Neill has already highlighted the critical role of Japan in helping to stop a global slowdown.

"Europe and Japan must tackle challenges in their economies to help contribute to global expansion and a reduction in external imbalances" said Mr O'Neill.

"They do not expect Japan to become an engine of world growth, but they do hope Japan can achieve positive growth," explained Japan's finance minister on his way to the meeting in Italy.

In denial

But Governor of the Bank of Japan (BOJ) Masaru Hayami has downplayed the chances of negative growth, saying that there is no chance of Japan's economy slipping into a deflationary spiral and that the bank had done all that is needed to put a floor under it.

But other cabinet colleagues, as well as national and international counterparts are still pressing for the BOJ to do more.

Japan cut its discount rate to 0.35% from 0.5% earlier this month, but this is a largely symbolic move.

And it is still reluctant to cut its interest rate from 0.5% to 0.

Slowing growth

Meanwhile, the latest economic report from the Japanese government downgrades its assessment of the economy for the first time in three months.

Although the report sticks to the official view that Japan is still on the path to a self-sustained recovery, it also acknowledges that the pace of recovery is slowing due to the US economic downturn.

Japan was thought to be emerging from an 11 year recession at the end of 1999, but the most recent figures show that it could be slipping back again.