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Friday, 9 November, 2001, 06:25 GMT
Japan admits economy is shrinking
Heavy discounts at a store in Tokyo
As deflation persists, shoppers are simply refusing to spend
Japan's rulers have bowed to the inevitable and admitted the economy is going to shrink this year, the first full year of contraction since 1998.

In a dour assessment of the prospects for any early turnaround, the government in Tokyo said that 11 September had been a "turning point".

Economic conditions are very severe... External shocks hit Japan when the economy was weak

Heizo Tanaka
economics minister
The government has been virtually the only body still betting on growth for the current financial year from April 2001 to March 2002.

Most other forecasters were already predicting something close to decline well before the attacks on the US.

That view is reinforced by the fact that economy had already shrunk 0.8% between April and June when compared to the previous year.

What the government now expects is a 0.9% contraction for the full year, rather than the 1.7% growth it previously predicted.

What next?

But the problem is what to do about the country's fourth recession in just 10 years.

The economy is suffering from deflation - a steady fall in prices. As a result Japanese consumers are simply refusing to spend, since their money will be worth more tomorrow than it is today.

Option are limited because of the decade-long fallout from the bursting of the 1980s economic bubble, which has hobbled banks with huge bad debts.

The cabinet on Thursday agreed a 2,995bn yen ($25bn) supplementary budget to help prime the economy.

But the fact that - for reasons of probity, given Japan's massive public sector debt - it is rather smaller than similar packages deployed in the past, a second outing may be necessary.

The prime minister, Junichiro Koizumi, is staking his still-high popularity on fiscal responsibility by setting a ceiling of 30,000bn yen in new government bonds.

But Finance Minister Masajuro Shiokawa hinted that it could be breached if other measures to reflate the economy could not be found.

"I often say that we will not stick to the 30,000bn yen bond limit at any cost," he said.

"If a critical event emerges, or forceful measures that ensure economic recovery become available, we will spend more to finance this."

Mr Shiokawa is more upbeat than most of his colleagues, having told Parliament yesterday that he believed the economy "is not as depressed as the figures show".

But the economics minister, Heizo Tanaka, was unrelenting.

"Economic conditions are very severe," he said. "External shocks hit Japan when the economy was weak."

Commerzbank's Ron Bevaqua
"You can't create a little bit of inflation"
See also:

08 Nov 01 | Business
Japan-China trade row lives on
06 Nov 01 | Business
Japan's households spend less
31 Oct 01 | Business
Japan's fading economy
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