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Thursday, August 13, 1998 Published at 21:36 GMT 22:36 UK

Business: The Economy

IMF calls for 'swift action' from Japan

Japanese traders are watching the economy nervously

The International Monetary Fund (IMF) has called on the Japanese government to take "swift and decisive action" to reverse the country's economic decline.

It said it expected Japan's Gross Domestic Product (GDP) to contract by 1.7% this year due to the sharp drop in first-quarter activity and that Japan's economic performance had been "much weaker than expected."

The fund "stressed the need for swift and decisive measures to reverse the deteriorating economic situation and place Japan back on a path of sustained domestic demand-led growth."

The IMF directors added in their annual review: "Such action is essential for the Japanese economy, and equally essential to underpin a turnaround in the Asia region.

"While the government has taken a number of welcome initiatives, the overall response thus far has fallen short of the timely, comprehensive and forceful programme that is required, given the seriousness of the present situation."

Business investment is forecast to fall 7.7% this year, in line with recent surveys and the depressed profit outlook.

In 1997 business investment rose 4.3% and Japan posted GDP growth of 0.8% in 1997.

Bank's gloomy outlook

Japan's central bank has also warned that economic conditions in the country are continuing to deteriorate.

Consumer spending and capital spending and wages are still falling, pushing up unemployment.

In its latest monthly report the Bank of Japan said the weak demand was leading to substantial production cutbacks.

[ image: Japanese Prime Minister Keizo Obuchi faces a huge challenge to turn around the economy]
Japanese Prime Minister Keizo Obuchi faces a huge challenge to turn around the economy
Job and wage conditions have grown worse due to pressure on company profits, the bank says.

Worryingly the report also suggests that any positive impact of the government's ¥16trillion ($109bn) stimulus package, which involves a series of major tax cuts, is only likely to be limited given the low level of economic activity in Japan.

Imports plunging

The gloomy report came as Japan announced a surge in its trade surplus for the first half of 1998, as the slump in consumer demand has caused imports to plummet.

The surplus in the current account, measuring the flow of goods, services and other transfers with overseas, soared by more than 50% to ¥7.6trillion ($51.9bn), Japan's finance ministry said.

Exports edged up just 1.5% to ¥24.45 trillion while imports slumped 10.9% to ¥16.85 trillion, the first decline in a half-year period for more than four years.

Japan's exports were undercut by the financial turmoil that has spread across Asia.

Exports hit by Asian crisis

"Imports are weakening sharply due to the recent slowing of domestic demand," said Andrew Shipley, economist at Schroders Japan.

However he said export growth was also likely to taper off, "resulting in the current account stabilising this year.

"Investment cutbacks throughout Asia will likely limit demand for machinery, which is the bulk of Japanese overseas shipments," Mr Shipley added.

The dollar strengthened again against the yen in late Tokyo trading, breaking through the ¥147 barrier again.

With anxiety growing on global financial markets, US Treasury officials confirmed that Treasury Secretary Robert Rubin and Japanese Finance Minister Kiichi Miyazawa will hold talks in San Francisco in early September.

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