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Wednesday, 26 September, 2001, 13:35 GMT 14:35 UK
Japan's slowdown to hit Asia
IMF logo
The International Monetary Fund (IMF) forecast a sombre short-term outlook for the Japanese economy, with significant implications for the rest of East Asia.

In its latest report on the health of World Economy, the IMF said it is "now likely" that Japan has slipped back into recession.

Real growth in the world's second largest economy is likely to decline by 0.5% in 2001 followed by a modest rebound in 2002, the IMF said.

This a gloomier forecast than the IMF issued a year ago, when it predicted Japanese growth of 1.75%.

Given the size of the Japanese economy, the IMF said, this "markdown of the growth outlook has significant implications for the rest of the world economy and East Asia in particular".

And it warns that Japan, despite its near-zero interest rates, may have to make further moves to ease monetary policy to help stimulate the economy.

East Asia vulnerable

Although East Asia has become less reliant on trade with Japan in recent years, Japan still absorbs about 12% of East Asian exports.

The report also warned that a further decline in already depressed Japanese stock markets could push regional equity markets down, though Japanese investors may switch funds to other Asian stock exchanges.

Japan's benchmark Nikkei index has fallen 30% so far this year, and is 6.3% down since the terrorist attacks on the United States.

The slowing Japanese economy could also restrict the ability of Japanese banks to continue to act as major lenders in other Asian countries as they tackle their own bad debt problems, the IMF cautioned.

Regional growth

The IMF gave an equally downbeat assessment of the prospects for much of the rest of Asia, particularly for newly industrialised countries such as Korea, Singapore, Taiwan and Malaysia.

Asean growth, 2000 vs 2001
Indonesia 4.8% vs 3%

Malaysia 8.3% vs1%

Philippines 4% vs 2.5%

Thailand 4.4% vs 2%
"Growth prospects have declined for most of the newly industrialised countries (Nics) and members of the Association of South East Asian Nations (Asean), it said.

Much will depend on the impact of the 11 September attacks on the economy of the United States: The IMF had been expecting Asian countries to see a pick up in their vital electronics exports to the US in early 2002.

Crisis into opportunity

Looking in more detail at Japan itself, the IMF said strong popular support for prime minister Junichiro Koizumi's reformist government means "there is now a renewed opportunity for change".

Although the outlook for the rest of 2001 remains very uncertain, the monetary easing policies adopted by the Bank of Japan to stimulate the economy are positive, the IMF said.

"There remains scope for more aggressive use of the (monetary) flexibility available....with the aim of achieving a rapid end to deflation, even if this were to result in some moderate weakening of the yen," it said.

South Asia growth 2000 vs 2001
India 6% vs 4.5%

Bangladesh 6% vs 5.5%

Pakistan 3.9% unchanged
And it urged Japanese policy makers "to resist pressure from vested interests, and to take full advantage of this opportunity to decisively address Japan's structural problems".

Those problems include a debt-burdened banking system and a corporate sector that has failed to tackle debt, reduce labour costs or strengthen profitability.

The necessary changes mean unemployment, already at a record 5%, is likely to rise in the short term, the IMF said.

Asian giants

Asia's other two giant economies, India and China, are relatively insulated from the world economy, the IMF said.

It expects China to continue growing strongly in 2001, buffered by plentiful investment from foreign corporations and the state as well as buoyant private consumption.

India, on the other hand, has been hurt by drought, energy price rises and the devastating Gurjarat earthquake.

"As a result, growth in 2001 is projected to drop to around 4.5%...well below levels considered necessary to make significant inroads into poverty," the IMF warned.

With a favourable monsoon, India's economy could recover gradually in the second half of this year.

But the recent slowdown will lead to a shortfall in taxes and push the public sector deficit to more than 11% in the current fiscal year.

Steps to tackle fiscal sustainability - including recently proposed legislation "remains critical", the IMF said.

The IMF praised India for halving the percentage of the population living below the poverty line in the last 25 years.

See also:

25 Sep 01 | Business
IMF shrugs off recession fears
25 Sep 01 | Business
Why consumer confidence matters
19 Sep 01 | Business
Fears grow for US economy
29 Aug 01 | Business
IMF to cut global forecasts
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